October 2005
Corrected: November 2005
IMF Country Report No. 05/384
© 2005 International Monetary Fund
Dominica: 2005 Article IV Consultation, Fifth Review Under the Three-Year
Arrangement Under the Poverty Reduction and Growth Facility and Requests for
Waiver of Nonobservance of Performance Criterion, Financing Assurances Review,
and Extension of Repurchase Expectations—Staff Report; and Public Information
Notice and Press Release on the Executive Board Discussion
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with
members, usually every year. In the context of a combined discussion of the 2005Article IV
consultation with Dominica and the fifth review under the three-year arrangement under the Poverty
Reduction and Growth Facility and requests for a waiver of nonobservance of a performance
criterion, financing assurances review, and extension of repurchase expectations, the following
documents have been released and are included in this package:
•
the staff report for the 2005 Article IV consultation, fifth review under the three-year
arrangement under the Poverty Reduction and Growth Facility and requests for waiver of
nonobservance of performance criterion, financing assurances review, and extension of
repurchase expectations prepared by a staff team of the IMF, following discussions that
ended on August 25, 2005, with the officials of Dominica on economic developments and
policies. Based on information available at the time of these discussions, the staff report was
completed on September 29, 2005. The views expressed in the staff report are those of the
staff team and do not necessarily reflect the views of the Executive Board of the IMF.
•
a Public Information Notice (PIN) and Press Release summarizing the views of the Executive
Board as expressed during its October 14, 2005 discussion of the staff report that concluded
the Article IV consultation, and the IMF arrangement, respectively.
The documents listed below have been or will be separately released.
Letter of Intent sent to the IMF by the authorities of Dominica*
Poverty Reduction Strategy Paper—Preparation Status Report
Statistical Appendix
Supplement Memorandum of Economic Policies by the authorities of Dominica*
Technical Memorandum of Understanding*
*May also be included in the Staff Report
The policy of publication of staff reports and other documents allows for the deletion of market-sensitive
information.
To assist the IMF in evaluating the publication policy, reader comments are invited and may be sent
by e-mail to publicationpolicy@imf.org.
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International Monetary Fund
Washington, D.C.
INTERNATIONAL MONETARY FUND
DOMINICA
Staff Report for the 2005 Article IV Consultation, Fifth Review Under the ThreeYear Arrangement Under the Poverty Reduction and Growth Facility and Requests
for Waiver of Nonobservance of Performance Criterion, Financing Assurances
Review, and Extension of Repurchase Expectations
Prepared by Western Hemisphere Department
(In consultation with other departments)
Approved by José Fajgenbaum and Matthew Fisher
September 29, 2005
•
Recent developments: The economy is recovering from the aftermath of an economic and financial
crisis in 2001–02 when output contracted by some 10 percent. The roots of the crisis lay in an
unsustainable build-up of public debt in the late 1990s. The build-up in domestic arrears that this
prompted, coupled with the adverse effects of a severe drought on agriculture and a decline in the
nascent tourism sector following the September 11 attacks, triggered a steep recession. The strong
fiscal adjustment and collaborative debt restructuring that the authorities subsequently put in place have
been accompanied by a rebound in output. The economy is set to register its second year of above
average growth in 2005.
•
Arrangement. A three-year Poverty Reduction and Growth Facility (PRGF) arrangement of
SDR 7.7 million (94 percent of quota) was approved on December 29, 2003. The last program review
was completed on March 7, 2005, and a total of SDR 4.2 million has so far been disbursed. Program
implementation remains strong, with all but one quantitative performance criteria observed. Progress at
structural reforms have been somewhat slower than envisaged, but remains satisfactory. In the attached
supplementary memorandum of economic policies, the authorities outline their reform program for
2005/06 and request completion of the fifth review.
•
Exchange regime. Dominica is a member of the Eastern Caribbean Currency Union (ECCU), which is
administered by the Eastern Caribbean Central Bank (ECCB). The common currency, the Eastern
Caribbean dollar, has been pegged to the U.S. dollar since July 1976 at US$1=EC$2.70. Dominica has
accepted the obligations of Article VIII, Sections 2, 3 and 4, and maintains an exchange system that is
free of restrictions on the making of payments and transfers for current international transactions.
•
Fund Relations. The last Article IV consultation was concluded in August 2002, and the Public
Information Notice (PIN) summarizing the Executive Directors’ views and policy recommendations is
available on the IMF’s public website at: http://www.imf.org/external/np/sec/pn/2002/pn02116.htm
•
Missions: Two missions visited Roseau. The first during June 9–23, 2005, comprising Messrs. Panth
(Head), Dyczewski, Njoroge, Rasmussen (all WHD), Selassie, Rodriguez (both PDR). Mr. Graham
(World Bank) and representatives from the ECCB and the Caribbean Development Bank participated in
the mission. Mr. Campbell (OED) and Ms. Sahay (WHD) joined the mission for the final discussions.
A second mission visited Roseau during August 22–26, 2005 to conclude the discussions, comprising
Messrs. Selassie (Head), Njoroge, Rasmussen (all WHD) and Rodriguez (PDR).
-2-
Contents
Page
Executive Summary................................................................................................................................ 4
I.
Introduction ................................................................................................................................... 5
II.
Background and Perspective.......................................................................................................... 6
III. Recent Developments and Performance Under the Program....................................................... 10
IV. Report on the Discussions ........................................................................................................... 13
A. Outlook ............................................................................................................................. 14
B. Reinvigorating Growth and Alleviating Poverty .............................................................. 15
C. Fiscal Policy and Debt Sustainability ............................................................................... 18
Medium-term context................................................................................................... 18
FY 2005/06 Budget...................................................................................................... 20
Dominica Social Security............................................................................................. 21
Other fiscal pressure points.......................................................................................... 21
Debt restructuring ........................................................................................................ 22
D. Addressing Vulnerabilities................................................................................................ 22
V.
Program Modalities ..................................................................................................................... 23
VI. Other Issues ................................................................................................................................. 24
VII. PRSP Status Report ..................................................................................................................... 25
VIII. Staff Appraisal ............................................................................................................................. 25
Text Boxes
1. Social Indicators ............................................................................................................................ 5
2. Past Staff Advice ......................................................................................................................... 10
3. Growth Performance and Potential.............................................................................................. 14
Tables
1. Selected Economic and Social Indicators ........................................................................ ............28
2. Summary Accounts of the Central Government.......................................................................... 29
3. Balance of Payments.................................................................................................................... 30
4. Summary Accounts of the Banking System ................................................................................ 31
5. Quantitative Performance Criteria (PC) and Indicative Targets (IT) .......................................... 32
6. Structural Benchmarks and Status of Structural Reforms ........................................................... 33
7. Medium-Term Macroeconomic Framework................................................................................ 34
8. Financial and External Vulnerability Indicators.......................................................................... 35
9. Schedule of Disbursements Under the PRGF Arrangement........................................................ 36
10. Indicators of Capacity to Repay the Fund, 2003–10 ................................................................... 37
11. Millennium Development Goals.................................................................................................. 38
-3-
Figures
1. Emergence of the Crisis................................................................................................................. 7
2. Tax Structure ............................................................................................................................... 17
3. Public Sector Debt Dynamics After Restructuring...................................................................... 19
Appendices
I.
Fund Relations. ............................................................................................................................ 39
II. Relations with the World Bank.................................................................................................... 41
III. Relations with the Caribbean Development Bank (CDB) ........................................................... 43
IV. Statistical Issues........................................................................................................................... 44
Attachments
I.
Letter of Intent and Supplement Memorandum of Economic Policies
of the Government of Dominica............................................................................................... 47
II. Technical Memorandum of Understanding ................................................................................. 59
III. Public Debt Sustainability Analysis ............................................................................................ 72
IV. Preparation Status Report of Growth and Social Protection Strategy ......................................... 78
-4-
EXECUTIVE SUMMARY
•
Dominica is recovering from the aftermath of an economic and financial crisis in
2001–02 when output contracted by 10 percent. With a rebound in economic growth,
strong fiscal consolidation, and a collaborative debt restructuring agreement, public
finances are now on a firmer footing. Playing off the recovery, the incumbent
administration won another five-year term in the May 2005 general elections.
•
The 2001–02 crisis originated in the expansionary fiscal policies of the preceding
decade, when the authorities sought to prop-up activity by increasing public
spending. By 2001, this approach had reached its limits and the government faced a
liquidity crisis. Coupled with the adverse effects of a severe drought and the September
2001 terrorist attacks, the result was a steep recession.
•
The authorities’ reform strategy has since mid-2003 aimed at ensuring an orderly
adjustment, followed by measures to reinvigorate growth. With the debt-to-GDP ratio
approaching 130 percent, the authorities concluded in December 2003 that the debt
situation was unsustainable and launched a debt exchange offer. The Fund has supported
the authorities’ reforms since 2002 initially through a Stand-By Arrangement (SBA) and
since end-2003 through a PRGF arrangement.
•
The strategy has been remarkably successful. Economic growth has increased to over
3 percent a year. The central government primary balance has swung to a surplus of
4½ percent of GDP in 2004/05, with both higher revenues and lower spending
contributing to the improvement. The debt restructuring process coupled with the fiscal
consolidation effort allowed the debt stock to decline to 117 percent of GDP at end-2004.
•
Program implementation has been solid and staff recommends completion of the
financing assurances review. All end-June quantitative performance criteria were met,
most with large margins, although the continuous performance criterion on external
arrears was missed. All three structural benchmarks for the fifth review have been
broadly completed, and legislation to introduce a VAT was recently passed by
Parliament. Progress on structural reforms has generally been slower than hoped,
reflecting limited implementation capacity and difficulties in building consensus.
•
More work is required to conclude the debt restructuring process. Agreements have
been reached with creditors holding about 70 percent of the debt eligible for
restructuring. Discussions with nonparticipating creditors continue and the authorities are
depositing interest payments into an escrow account under the restructured terms. The
issuance of new bonds to all participating creditors has, however, yet to be completed.
•
The critical challenge now is sustaining the current growth momentum. Ensuring
progress in lowering poverty and unemployment will require decisive action. Challenges
include the poor prospects for the banana sector, rising oil prices, a high vulnerability to
natural disasters, the continued high debt level and the large unfunded liabilities in the
social security system, and structural rigidities. Consistent with the increased focus on
growth, the authorities’ program for 2005/06 has a stronger emphasis on structural
reforms, with the forthcoming Growth and Social Protection Strategy document
representing an important step forward.
-5-
I. INTRODUCTION
1.
Dominica has come a long way from the low-point of the 2001–02 economic crisis
when output contracted by 10 percent. Economic growth has recovered more recently and
is set to record the second straight year of above average growth in 2005. Reflecting strong
fiscal consolidation and a collaborative debt restructuring agreement, public finances are now
on a firmer footing. The structure and transparency of public finances is also improving.
2.
Playing off the recovery, the incumbent administration won another five-year
term in the May 2005 general elections. The Dominica Labor Party (DLP) was returned to
Parliament with an increased majority. The opposition campaigned vocally against the Fundsupported program.
3.
The critical challenge for the authorities now is sustaining the current growth
momentum. While
Box 1. Social Indicators
Dominica has been at the
forefront in addressing the
In a regional perspective, Dominica has a per capita income at the lower
end among the Eastern Caribbean Currency Union (ECCU) countries but
fiscal challenges that most of
relatively high social indicators. The economy is highly dependent on
the countries in the region
agriculture (banana) with manufacturing and tourism playing a lesser role.
1
face, it has yet to tackle the
Table 1. Social Indicators
constraints on growth. Like
Human
other countries in the region,
Life
Development
sustained private sector-led
Voice and
Poverty
Index Ranking Expectancy
GDP per
at Birth
Accountability 2/
Rate
1/
Capita (US$)
growth has proved elusive in
Dominica, and prospects for
Caribbean
5,366
78
69
68
28
maintaining growth at
ECCU
5,633
73
72
74
27
Non-ECCU
5,189
81
68
65
29
current levels remain
Dominica
3,554
95
73
81
33
uncertain. Structural
Source: World Bank.
rigidities abound in the
1/ Out of 174 countries.
economy and, without
2/ Percentile ranking.
decisive action to address
these bottlenecks, progress in lowering poverty and unemployment (Box 1) will be
constrained.
4.
The Fund has supported the authorities’ reforms since 2002 initially through a
Stand-By Arrangement (SBA) and since end-2003 through a PRGF arrangement.
Program implementation since the introduction of the PRGF has been solid. In the attached
letter of intent and supplementary memorandum of economic policies (MEP), the authorities
1
See Eastern Caribbean Currency Union—Report for the 2005 Regional Discussions, IMF Country Report
No. 05/304.
-6-
outline their economic policies for the coming months and request a waiver for the
nonobservance of a performance criterion for completion of the fifth review under the PRGF.
II. BACKGROUND AND PERSPECTIVE
5.
The roots of the 2001–02 economic crisis lie in the expansionary fiscal policies of
the preceding decade. As output growth
Dominica: Primary Expenditure and Public Debt
declined in the 1990s, the authorities sought
1994-2004
to prop-up activity by increasing public
(in percent of GDP)
spending. The primary balance of the central
40
140
130
government turned strongly negative in the
36
120
mid-1990s, and public debt quickly reached
110
unsustainable levels (Figure 1). By 2001, this
32
100
approach had reached its limits. With
90
financing only available at precipitously high
28
80
70
interest rates, the newly elected DLP
24
60
government faced a major liquidity crisis.
50
The build-up in domestic arrears that ensued,
20
40
coupled with the adverse effects of a severe
1994/95 1996/97 1998/99 2000/01 2002/03 2004/05
drought on agriculture and the September
Primary expenditure (left scale)
Public debt (right scale)
2001 terrorist attacks on the nascent tourism
sector, precipitated a steep recession.
6.
Dominica’s recent growth performance has been much weaker than the other
ECCU countries. While output growth in Dominica kept pace with its brethren in the 1980s,
the situation reverses for much of the 1990s. Dominica also experienced the sharpest
recession following the September 11 attacks. What explains this difference?
20
04
20
02
20
00
19
98
19
96
19
94
19
92
19
90
19
88
19
86
19
84
19
82
The dominant role of agriculture. Agriculture (banana production, in particular)
plays a much larger role in Dominica than in the other ECCU countries, and the
1990s were a relatively
Dominica and Rest of ECCU: Real GDP Growth 1980-2005
difficult time for the sector.
(3-year moving average)
20
Reflecting the uncertainty
Dominica annual growth
regarding the future of the
15
Non-Dominica ECCU
preferential trade arrangements
Average
10
for bananas, a trend decline in
the banana export price, and
5
the higher productivity of other
producers, acreage,
0
employment and investment in
-5
the sector has been declining
since the early 1990s.
19
80
•
-7-
Figure 1. Dominica: Emergence of the Crisis
The growth slowdown was regional.
12
As growth slowed in the 1990s...
Sectoral contribution to real GDP growth
Real GDP Growth
(annual percentage change, 3-year moving average)
10
1986-90 1991-95 1996-00 2001-02 2003-04
(annual percentage change)
8
6
ECCU
4
2
0
Dominica
-2
-4
Real GDP Growth
5.2
2.1
2.2
-4.4
1.7
Bananas
0.8
-0.6
-0.1
-0.6
-0.2
Government Services
0.4
0.1
0.5
0.8
-0.6
Manuf/Constr/Trade
1.8
1.0
0.6
-1.9
1.1
Other
2.2
1.6
1.2
-2.7
1.5
-6
1980
1985
1990
1995
2000
... the government payroll expanded dramatically
in the second half of the 1990s...
3200
...as did government investment financed by
borrowing.
18
Wages and Payroll
Investment Financing
16
(in percent of GDP)
Wage bill
(in percent of GDP, right scale)
17
3000
16
14
Total
12
10
2800
15
14
2600
8
6
of which:
non-grant financed
4
13
Number of established posts
2400
12
1993/94
1995/96
1997/98
1999/00
2001/02
2003/04
Sources: Dominican authorities; and Fund staff estimates.
2
0
1993/94
1995/96
1997/98
1999/00
2001/02
2003/04
-8-
2004
2002
2000
1998
1996
Migration. With per capita income at the low-end in the region, emigration (and
consequent loss of human capital) from Dominica has not just been to the OECD
countries but also to the richer countries in the region.
1994
•
1992
Agricultural difficulties were compounded by the government’s liquidity
constraints in 2001–02. While the
Dominica and the Rest of ECCU: Public Debt
other ECCU countries also attempted
1990-2004
140
to counteract the 1990s growth
slowdown through expansionary fiscal
120
policies, only in Dominica did the
Dominica
liquidity constraint become binding.
100
This seems to reflect concerns about
80
the country’s growth prospects. With
few beaches at hand, the scope to
60
diversify economic activity away from
the Rest of ECCU
agriculture to traditional tourism
40
activities as in the other neighboring
islands was limited.
1990
•
7.
As government arrears mounted, macroeconomic policies could do little to
counter the 2001–02 recession. The downturn also weakened revenue collection, causing
the primary balance to swing more sharply
Dominica: Contribution to Real GDP Growth
into deficit (8½ percent of GDP in 1999/00).
1996-2004
After peaking at 38 percent of GDP in
6
1999/00, public spending was reduced
4
sharply in face of financing constraints
2
contributing to the drop in output. The arrears
0
that the government accumulated to the
-2
domestic private sector also caused private
-4
demand to decline. Monetary policy,
-6
conducted at the regional level, remained
-8
largely passive.
-10
1996
1998
2000
2002
2004P
8.
The stabilization program
government consumption and investment
(supported by a SBA) introduced in the
private consumption and investment
2002/03 budget soon fizzled due to weaker
than expected economic conditions and
policy slippages. Economic growth in 2002 was much weaker (-4½ percent) than envisaged
under the SBA (-½ percent), reflecting lower exports and tourism receipts, as well as an
unforeseen sharp decline in private and public investment (the latter due to slow
implementation of the public sector investment program). Despite higher foreign grants and
lower capital spending, the overall deficit target for 2002/03 was 1½ percent of GDP worse
than budgeted because of cyclical factors and the failure to hold down the wage bill as
envisaged. With little progress on the fiscal front, arrears to private creditors continued to
accumulate.
-9-
9.
The more focused and comprehensive adjustment strategy adopted in mid-2003
enabled the economy to emerge from the crisis (Box 2). This revised strategy—initially
supported by the SBA and a PRGF since December 2003—focused first on prospects for an
orderly adjustment, followed by measures to reinvigorate growth and a debt strategy to
ensure medium-term fiscal sustainability. The strategy has been remarkably successful,
allowing growth in 2004–05 to converge to the ECCU regional average:
•
Fiscal consolidation. A central government primary balance of 3 percent of GDP
was established as the objective for budgetary policies in due course. In the event, the
primary balance has swung from an average deficit of 1½–2 percent of GDP in 2001–
03 to a surplus of 4½ percent of GDP in 2004/05 (about 4 percent of GDP excluding
one-off factors). Both higher revenues and lower spending contributed to the
improvement. Revenue measures aimed at broadening the tax base and improving the
efficiency of the tax system, and the economic recovery also helped to increase the
revenue to GDP ratio. On the expenditure side, the government has shown
remarkable restraint. The wage bill, which at 17 percent of GDP was one of the
largest in the region, has been reduced by more than 3 percentage points. Nongrant
funded investment spending has also been scaled back.
•
Debt restructuring. With the debt-to-GDP ratio approaching 130 percent, the
authorities concluded in December 2003 that the debt situation was unsustainable, an
assessment supported by the staff. The debt exchange offer that the authorities
eventually launched was aimed primarily (but not exclusively) at private sector
creditors.2 The restructuring process coupled with the fiscal consolidation effort has
allowed the debt stock to decline to 117 percent of GDP at end-2004.
•
Structural fiscal reforms. A broad range of structural reforms have been initiated,
though only a few have come to fruition. Most notably, legislation to introduce a
VAT was recently passed by Parliament. Progress on other fronts has, however, been
slower than hoped. In the main, this reflects the very limited implementation capacity,
including from the government’s inability to build consensus in some areas.
2
Claims issued prior to December 2003 were to be exchanged for three new local currency denominated bonds
carrying a coupon rate of 3.5 percent. These bonds have 10, 20 and 30-year maturities, and entail principal
reductions of 30, 20, and 0 percent, respectively.
- 10 -
Box 2. Past Staff Advice
The authorities feel that previous staff advice has been broadly useful …
They noted that despite limited appetite for Fund-supported programs in the region and harsh
criticism at home, they had sought Fund advice and support for their economic program. Moreover,
the policies that have been pursued have paid off as evidenced by the quick resumption of growth.
but with a couple of caveats:
First, officials wondered if the Fund should not have been more candid about the large expensively
financed spending increases in the late 1990s. For instance, they noted that staff statements had on
one occasion referred to these spending plans as being “ambitious.” This was used in public debates
by the then administration, as a validation of its economic strategy.
Second, the authorities thought that the Fund had at times not been cognizant enough of Dominica’s
limited capacity to implement structural reforms.
III. RECENT DEVELOPMENTS AND PERFORMANCE UNDER THE PROGRAM
10.
Recent economic developments have been favorable:
•
Economic growth has resumed and inflation remains subdued. Real GDP
increased in 2004 by an estimated
Dominica: Output Indices
3.5 percent. The expansion was
7000
relatively broad based, with
virtually all sectors showing a
Total Manufactured Production
6000
(EC$ million, right scale)
pick-up. The expansion has
continued and staff and the
5000
authorities expect real GDP
Imports of Construction Materials
growth to reach 3 percent in 2005
4000
(EC$ million, right scale)
(albeit subject to downside risks).
Inflation declined in 2004 and has
3000
Banana Production
remained subdued through July
(metric tonnes, left scale)
2005, despite the pass through of
2000
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
higher energy prices to consumers.
2003
2004
2005
16
14
12
10
8
6
- 11 -
•
Mirroring the domestic recovery, import growth has picked up. Increased
tourism receipts however ameliorated the current account impact, with merchandise
exports broadly unchanged.3
•
Financial intermediation has also rebounded (Table 4). After a contraction that
started in mid-2001, credit to the private sector
Dominica: Monetary Developments
(Annual percentage change)
turned positive from mid-2004.
25
Notwithstanding the pick-up in credit
20
growth, banking system liquidity remains
Broad Money
15
high due, in part, to the strengthened fiscal
10
accounts and also growing deposits. Banks
have used this opportunity to increase their
5
net foreign asset position in recent months.
0
The debt restructuring (by design) had a very
Private Sector Credit
-5
limited effect on banks’ balance sheets.
-10
Moreover, indicators of banking system
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
soundness suggest a modest reduction in
nonperforming loans.
•
The East Caribbean dollar, which is
pegged to the U.S. dollar, has
depreciated markedly in real
effective exchange rate (REER)
terms since 2002. Mirroring the U.S.
dollar, the E.C. dollar depreciated in
real effective terms by 7 percent in
2004 and by a further 3½ percent
through mid-2005. The continuing
rapid growth in tourism and related
activities are suggestive of
competitiveness being adequate.4
DMA: Effective Exchange Rates (1990 = 100)
160
150
140
160
150
Nominal Effetive
Exchange Rate
140
130
130
120
120
110
110
100
100
90
80
Real Effective
Exchange Rate
80
70
19
90
M
1
19
92
M
1
19
94
M
1
19
96
M
1
19
98
M
1
20
00
M
1
20
02
M
1
20
04
M
1
70
90
11.
Performance relative to the program targets has been solid.
•
All end-June quantitative performance criteria were met, most with large
margins (Table 5). The continuous performance criterion on the nonaccumulation of
external arrears was, however, missed due to a brief delay in servicing a government
guaranteed loan.
3
The first round effect of higher oil prices on imports in 2005 is estimated to be about 2 percentage points of
GDP, although this is set to be partially offset by endogenous changes, including lower oil demand.
4
See P. Cashin, P. Njoroge, and P. Rodriguez (2004), Competitiveness in the ECCU: Measures of the Real
Exchange Rate, ECCU Selected Issues, IMF Country Report No. 04/335.
- 12 -
•
Fiscal performance in FY 2004/05 was strong. Revenue collection was almost
2 percentage points of GDP higher than previously projected, reflecting arrears
collection and windfall gains.5 Current expenditures exceeded the baseline program
target, but this was mainly on account of an unbudgeted transfer of ¾ percent of GDP
required for the establishment
Dominica: Recent Fiscal Performance
of the regional Caribbean
2003/04
2004/05
Court of Justice (CCJ). At the
Prog.
Actual
Prog. 3/ Actual
same time, delays in project
(in percent of period GDP)
Primary balance 1/
1.7
5.6
2.0
4.4
execution and donor
disbursement saw significant
Revenues (excl. grants)
29.5
31.2
31.3
33.1
shortfalls in capital spending. Non-Interest Expenditures and Other
-27.9
-25.6
-29.3
-28.8
At 4½ percent of GDP
Non-interest current expenditures
-26.8
-25.4
-24.7
-25.3
Investment (net of grants) and other 2/
-1.1
-0.2
-4.6
-3.5
(4 percent excluding the oneMemorandum item:
offs from migrants deposits
Grants
7.4
8.8
8.1
5.9
and the CCJ payment), the
Non grant-financed investment (ratio)
32
29
39
41
1/ Measured from below the line.
primary surplus for the year
2/ Includes net lending and statistical discrepancy.
3/ IMF Country Report No. 05/117.
was 2½ percentage points of
GDP higher than programmed.
12.
There has been encouraging progress on structural reforms (MEP ¶5).
•
All three structural benchmarks for the fifth review have been broadly completed
(Table 6), although the proposals to amend the Finance Administration Act were
finalized without numerical targets.
•
The government has decided to publish in the Official Gazette all Cabinet decisions
granting new tax and duty concessions, identifying the beneficiary as well as its legal
basis—a step that will enhance the transparency of public finances.
•
With parliamentary approval of the VAT and excise tax legislations, substantial
progress has been made towards the introduction of a VAT on March 1, 2006.
13.
More work is required to conclude the debt restructuring process. As reported
previously (IMF Country Report No. 05/117), agreements have been reached with creditors
holding just above 70 percent of the debt eligible for restructuring. Discussions with three
creditors that account for the bulk of the remaining unrestructured debt are continuing.
However, staff understands that one of these creditors, the Exim Bank of Taiwan Province of
China, recently filed suit in a New York District Court to recover its claim (about US$12
million). Given that the court case has just been initiated, its implications on Dominica’s
5
The fiscal accounts benefited from some 1 percent of GDP in migrants’ deposits—proceeds required of
regional migrants, and forfeited when they fail to return to their country of origin. The fees were introduced to
stem the flow of migrants using Dominica as a transit point to neighboring French territories. The government
has further tightened travel restrictions in recent months, and now requires most such travelers to obtain a visa
to travel to Dominica.
- 13 -
ability to reach collaborative agreement with this creditor and on program implementation
remain uncertain. Staff will review documents as they become available and will monitor
developments closely. As a sign of good faith toward nonparticipating creditors, the
authorities have continued to deposit into an escrow account interest accrued under the
original terms until the date the exchange offer was closed, and under the restructured terms
subsequently.
IV. REPORT ON THE DISCUSSIONS
14.
The Article IV consultation and program discussions took place against the
backdrop of a broadly favorable economic environment, but with concerns about its
medium-term viability and the need to reduce poverty. Notwithstanding the recent gains,
the authorities acknowledged that much remains to be done to sustain the current growth
momentum—which is essential for the government’s central objectives: job creation and
poverty alleviation. The government’s strategy document to address these objectives—the
Growth and Social Protection Strategy—is currently being finalized. The authorities
reiterated their commitment to prudent fiscal policies, accelerating structural reforms and
reducing vulnerability to shocks. Against this background, the policy and program
discussions focused on:
•
Sustaining the current growth momentum. The government recognized the large
role that temporary factors (including favorable agriculture conditions in 2004) have
played in the recent upturn. The discussions therefore focused on how best to remove
policy-induced distortions that might impede private investment.
•
Putting public finances on a sustainable footing. With the 2004/05 primary balance
having reached the level targeted for gradually reversing the debt build-up of recent
years, discussions focused on measures required to ensure the long-term viability of
public finances. The scope and options for accelerating many of the structural fiscal
reforms under the program was also considered.
•
Reducing vulnerability to shocks. Discussions on Dominica’s vulnerability to
natural disasters were put sharply into focus by the earthquake that hit the north of the
island last November, causing damage estimated at 7 percent of GDP. The risks that
the limited oversight of the domestic financial sector poses were also considered.
- 14 -
A. Outlook
Staff and the authorities worked together to update the medium term
macroeconomic framework (Table 7).
Dominica: Tourism Receipts
There was broad agreement that annual
(Index 1990=100)
GDP growth of some 3 percent should be
240
240
feasible over the medium term (Box 3), and 220
220
Dominica
that annual inflation would remain subdued 200
200
at below 2 percent. The external current
180
180
account is expected to improve over the
160
160
World
medium term. Strong growth in tourism
140
140
receipts should continue in the near term—
120
120
ECCU
particularly in view of the recent expansion 100
100
of hotel room capacity—and merchandise
80
80
exports (of niche agricultural products) are
1990 1992 1994 1996 1998 2000 2002 2004
Source: World T ourism Organization and Caribbean
expected to strengthen in the outer years.
T ourism Organization.
Import growth, after rising sharply this
year, reflecting higher private and public
investment, is expected to slow somewhat.
15.
Box 3. Dominica: Growth Performance and Potential
Dominica’s growth potential is better than recent experience would imply and macroeconomic
policies remain key to achieving higher growth.
•
Simple simulations show that, given its endowments, Dominica is performing below its growth
potential. Barro (1991) uses variations in initial per capita income, human capital and
government consumption to explain growth rates across a wide number of countries.1/ Levine and
Renelt (2002) use, in addition, investment and population increase as other growth determinants.
These equations predict per capita income growth for Dominica in the range of 2¾−6 percent.
Even at the conservative end, the realized rate, during 1990−2003, of about 1½ percent compares
unfavorably.2/
•
Reducing government size and increasing trade can significantly improve performance. A World
Bank cross-Caribbean econometric study suggests that if policy trends in the 1990s had persisted,
Dominica’s annual growth would be even lower—with the increasing inward orientation of the
economy and upward movement in government consumption more than offsetting the impact of
increased education, financial deepening, and stronger public infrastructure.3/ Critically, this same
study finds that if instead, Dominica’s government consumption burden decreased to the
75th percentile ranking in the Latin America and Caribbean region, annual real GDP growth
could jump to 2.9 percent.
______________________________________
1/ R. J. Barro, (1991). Economic Growth in a Cross-Section of Countries. Quarterly Journal of Economics,
Vol. 106, pp. 407−443.
2/ R. Levine, and D. Renelt (1992). A Sensitivity Analysis of Cross-Country Growth Regressions,
American Economic Review, Vol. 82, pp. 942−63.
3/ World Bank. A time to Choose: Caribbean Development in the 21st Century. 2005.
- 15 -
16.
Considerable uncertainty attaches to this scenario.
•
On the positive side, Dominica’s forested volcanic topography and underwater
attractions render it well placed to exploit the fast growing global adventure and
nature-based tourism. The considerable potential to export geothermal-based
electricity to the neighboring French territories of Guadeloupe and Martinique, if
realized, could boost output significantly.
•
On the other hand, downside risks are nontrivial. Prospects for the banana sector
remain grim, particularly in light of the EU’s recently announced plans for reforming
its import arrangements. Despite shrinking considerably in the past decade, the sector
continues to employ a large number of farmers. However, some observers,
particularly the representatives of the banana sector, believe that the sector can
rebound. The recent rise in oil prices—which have been passed on in full to
consumers, but at times with a short delay—and their potential to dampen private
consumption also heighten downside risks, particularly in the near term. Dominica’s
high vulnerability to natural disasters and its high debt (notwithstanding the debt
restructuring) are major risks.
B. Reinvigorating Growth and Reducing Poverty
17.
The authorities stressed their desire to see the private sector play a dominant
role in the economy. They acknowledged that, despite past high levels of public investment,
growth prospects had failed to improve and unemployment and poverty remain high—at
25 percent of the labor force and 33 percent of the population, respectively, as of 2002. Staff
concurred with this assessment, noting that investment in infrastructure in the past had been
neither well-considered (often projects were left incomplete) nor affordable (financed
nonconcessionally). The significant loss of human capital through migration had further
undermined growth potential. Against this backdrop, staff and the authorities agreed on the
need for policies to facilitate a shift away from the public sector driven growth and
employment, in favor of the private sector. These include, removing policy-induced
bottlenecks (see below) to allow emerging sectors to flourish, better prioritizing public sector
investment, and improving the private sector investment climate.
18.
There was broad agreement that, at its current level, the real exchange rate
would not hamper growth prospects. The U.S. dollar’s depreciation since 2002 has
allowed CPI-based REER to revert to pre-1990s levels, giving competitiveness a positive
fillip. The authorities were satisfied that any misalignment of the E.C. dollar had been
eliminated by this depreciation. They considered that the recent focus on niche markets
where the country had a comparative advantage, such as adventure tourism and high value
added agricultural products, would be beneficial given that wages in Dominica were not
particularly low. Tourism industry representatives noted an urgent need for better training
and infrastructure development, but otherwise felt that the sector was reasonably
competitive. Other business community representatives stressed the high cost of electricity
and shipping, and a slow and unnecessarily bureaucratic investment approval process. The
- 16 -
authorities noted that both the high cost of electricity and the investment approval process
are going to be addressed in the coming months.
19.
The mission stressed the need to address bottlenecks to investment—some of
which are being tackled as part of the PRGF-supported program.
•
The privately-owned electricity company, DOMLEC, currently has monopoly rights
for electricity generation, transmission and distribution. Staff therefore emphasized
the need to revamp the legislative framework governing the electricity sector to allow
new entrants, including to tap the country’s considerable geothermal potential. The
envisaged reforms, which the authorities would like to put in place by the end of this
year (MEP ¶10), will establish a regulatory commission and institute a tariff structure
more reflective of production costs.
•
The public sector agencies engaged in investment promotion—Dominica Export
Import Agency (DEXIA), the National Development Cooperation (NDC) and AID
Bank—also need to be reviewed. The mission questioned the need for three
institutions, as well as their effectiveness in promoting investment and limited
accountability. DEXIA’s monopoly on rice and sugar importation is questionable
given the desire for the private sector to play the dominant role in the economy.
NDC’s investment approval process is slow and uncertain, and the agency fails to
operate as a “one-stop” investment promotion agency. The AID Bank’s balance sheet
needs closer scrutiny. The authorities are of the view that all three institutions had a
role to play in the economy, but acknowledged that their operations may need
streamlining. To that end, they agreed to undertake strategic reviews of all three
institutions and establish implementation action plans by end-December 2005
(MEP ¶10).
•
The mission also pointed to the absence of a national cadastral survey, and land
registration is neither mandatory nor comprehensive, often making it difficult to
establish ownership unambiguously and to use land as collateral for borrowing. The
mission urged the authorities to accelerate the program to modernize land
registration.
20.
There was extensive discussion on the merits of tax incentives to promote
investment. Staff argued that incentives are costly (forgone customs revenue in 2004/05 are
estimated at about 4½ percentage points of GDP), administratively burdensome, and
nontransparent (Figure 2). Moreover, policies that seek to identify and support winners are
likely to create a cycle of dependency that sustains uncompetitive firms. The authorities
argued that competition between regional economies generates considerable pressure for
granting tax incentives for new investments. The government also thought the costs
identified by staff were somewhat exaggerated given that the imports may have never have
existed as a revenue source in the absence of the tax concessions. The mission nonetheless
- 17 -
Figure 2. Dominica: Tax Structure
...and increasing.
Overall, taxes are high…
30
4
Total tax revenue
(in percent of GDP)
26
Change in total tax revenue
during the 1990s
3
(in percent of GDP)
2
22
1
18
0
14
-1
10
-2
Do m inic a
S m a ll Is la nds
Res t o f
C AR IC OM
Uppe r-m iddle inc o m e
c o untrie s
Do m inic a
12
International Trade Taxes
(in percent of GDP)
6.0
S m a ll Is la nds
10
5.5
Import duty revenue
as a percentage of total imports and exports
Early 1990s
Early 2000s
8
5.0
Uppe r-m iddle inc o m e
c o untrie s
…even as others move away from them fast.
Receipts from trade taxes have increased...
6.5
Res t o f
C AR IC OM
T rade T ax Revenue
6
4.5
4
4.0
2
3.5
0
3.0
1993/4
1995/6
1997/8 1999/00 2001/02 2003/04
Do m inic a
S m a ll Is la nds
Uppe r-m iddle - High-inc o m e
inc o m e
c o untrie s
c o untrie s
…because of a shrinking base.
But corporate income taxes have fallen…
100
Change in tax revenue in the 90's
80
(in percent of GDP)
Dominca: Corporate Tax Revenues
(percentage change from early 1990s to 2000)
60
Temp o rary s tab ilizatio n levy o n
wag e inco me
40
Pers o nal Inco me Taxes
20
Other internatio nal trad e taxes
0
Imp o rt Duties
-20
Do mes tic taxes o n g o o d s and
s ervices
Base
Corporate tax revenue
-40
Co rp o rate Inco me Taxes
-60
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
Do m inic a
Source: Keen and Simone (2004) and Fund Staff calculations.
Sm a ll
Is la nds
Res t o f
C AR IC OM
Uppe rm iddle inc o m e
c o untrie s
Highinc o m e
c o untrie s
- 18 -
noted that the concessions’ benefits in terms of increased FDI appear to have been limited.
Further, a recent World Bank survey of firms operating in the ECCU region suggests that
investors attach a relatively low weight to fiscal incentives in determining investment
location. Staff recommended adopting a regional cooperative approach in reducing statutory
concessions. The authorities agreed to undertake a comprehensive review of statutory
exemptions (MEP ¶20) and keep to a minimum recourse to discretionary tax exemptions—
which has been increasing lately.
21.
The authorities intend to strengthen policies on education and migration. The
loss of a substantial number of nurses in recent years, to the U.S. and U.K., in particular, has
strained local medical services delivery. The authorities saw scope for expanding the training
of nurses in the near term, perhaps with private-sector interest, to a full-fledged export sector.
Staff saw merit in this initiative, but noted the need to limit the budgetary implications by
obtaining full cost recovery. The authorities were also keen to increase remittances and
investment from Dominica’s Diaspora to offset the ‘brain drain.’ They noted that initial steps
had already been taken towards defining such a policy by commissioning a report by
Dominicans in the Diaspora on how best the government can facilitate these activities.
C. Fiscal Policy and Debt Sustainability
Medium-term context
22.
Discussions on the FY 2005/06 budget were preceded by a comprehensive
assessment of the medium-term fiscal outlook.6 The debt sustainability analysis discussed
with the authorities affirms that the 3 percent of GDP central government primary surplus
being targeted under the program would ensure a gradual decline in debt, provided growth
remains at current levels and Dominica Social Security’s (DSS) finances are improved.7 Staff
highlighted the sensitivity of the public debt path to both the assumed primary surplus and
the economic growth rate.8 Abstracting from DSS deficits, if a primary surplus of just
2 percent of GDP were to be targeted, the debt to GDP ratio would remain above 80 percent
through 2015 (Figure 3). In the same vein, an average growth performance of 1–2 percent
during the projection period would result in a similar very gradual decline in public debt
(Figure 3). In both cases, the inclusion of DSS deficits projected under current policies would
6
The medium-term primary balance objective under the program was initially based on growth remaining at the
historical average of 2 percent per year, but it did not take into account the projected deficits of the social
security system (see below).
7
Under the baseline scenario, debt would decline to 60 percent in 2018. The fiscal benchmarks approved by the
ECCB’s Monetary Council call for this target to be achieved by 2007.
8
The analysis assumes that nonparticipating creditors agree to participate in the debt restructuring process.
- 19 -
Figure 3. Dominica: Public Sector Debt Dynamics After Restructuring
120
120
At 3 percent real GDP growth rate. Abstracting from DSS
deficits and costs of natural disasters.
110
100
110
100
1 percent primary surplus
Debt/GDP
90
90
80
80
2 percent primary surplus
70
70
60
60
50
50
3 percent primary surplus
40
40
30
30
2004
2006
2008
120
2010
2012
2014
2016
2018
2020
2022
2024
At 3 percent Primary Surplus. Abstracting from DSS deficits and
costs of natural disasters.
110
100
Debt/GDP
80
90
80
70
2 percent real GDP growth
60
70
60
50
50
3 percent real GDP growth
40
40
30
30
2004
2006
2008
2010
2012
2014
2016
2018
2020
2022
2024
180
180
At 3 percent real GDP growth rate. Including impact of DSS deficits starting in 2014,
and abstracting from the costs of natural disasters.
160
140
Debt/GDP
110
100
1 percent real GDP growth
90
160
120
140
120
120
1 percent primary surplus target
100
100
2 percent primary surplus target
80
60
80
3 percent primary surplus target
40
60
40
2004
2006
2008
2010
2012
2014
Source: Country authorities and Fund staff estimates.
2016
2018
2020
2022
2024
- 20 -
put the debt path back on an unsustainable trajectory (Figure 3). The authorities agreed that
there were two options to avoid such an outcome: a primary balance target above 3 percent
or adjusting the parameters of the social security system to eliminate DSS deficits. They saw
merit in addressing these deficits through reforms (see below) rather than targeting a
permanently higher primary surplus. The mission supported this approach.
FY 2005/06 budget
23.
Despite its mildly expansionary stance, the FY 2005/06 budget is consistent with
further debt consolidation (MEP ¶11–13). Based on relatively conservative revenue
estimates, the authorities’ budget targets a central government primary surplus of 3 percent
of GDP to help reduce the debt burden.9 The improved fiscal outlook and projected increase
in grants has created room to increase capital expenditure to address, among others, the much
needed road repairs required following last year’s earthquake. Current expenditure will
remain contained, with noninterest outlays held constant in real terms and the wage bill
broadly unchanged as a ratio to GDP. By prioritizing capital projects within a tight overall
expenditure envelope, the budget aims to support growth.
24.
The mission welcomed the budget, but noted that adhering to the wage bill
target would require complementary reforms. The authorities restored the 5 percent cut in
public sector wages introduced in the 2003/04 budget. Staff supported this initiative, but
regretted that delays in identifying and reducing excessive public sector employment as
envisaged under the program will preclude a reduction in the wage bill to GDP ratio. The
authorities stressed their commitment to a smaller, more efficient and better paid public
service. Moreover, they intend to reduce the wage bill by 1–1½ percentage points of GDP
over the medium term from its current level of 13¾ percent of GDP (MEP ¶16). This target
will be realized principally through streamlining, commercializing or privatizing nonessential
services.10 To ensure adherence to the budgeted wage bill ceiling in 2005/06, the government
has initiated steps to outsource janitorial and government building security services as well
as streamlining the airports and ports authorities (MEP ¶16).
25.
Staff noted that effective implementation of the public sector investment
program (PSIP) will be a major challenge given its size and capacity constraints. The
sectoral composition of the PSIP could be brought more in line with the government’s
growth strategy by focusing on investments in human and physical capital. Monitoring and
planning of the PSIP could be strengthened by prioritizing projects in a comprehensive
multi-year rolling framework, and sequencing in line with institutional capacity and the flow
9
Under the program, any additional revenue from migrants’ deposits will not count towards the primary balance
target, but go towards reducing debt.
10
A preliminary review by the ministry of finance has shown scope for reducing the wage bill by as much as
1 percentage point of GDP.
- 21 -
of funds. The authorities noted that greater flexibility in the use of grant funds from donors
would improve PSIP execution.
Dominica Social Security
26.
The authorities and staff agreed that a key priority will be addressing precarious
DSS finances. A recent FAD/World Bank technical assistance mission confirmed that, as the
pension system matures and the ratio of contributors declines, DSS will start to run deficits
(by about 2014) and eventually deplete its reserves (by about 2025). The system’s unfunded
liabilities are estimated at some 150 percent of 2004 GDP and represent a major threat to
public finances. Adjustments that need to be considered to address this risk include: a
gradual reduction in benefits; raising the statutory retirement age; increasing the contribution
rate; and diversifying the investment portfolio. Staff stressed that the early initiation of
reforms could help avoid abrupt and drastic changes later. The authorities acknowledged the
need for reform, and have undertaken to review reform options in a timely way (MEP ¶15).
Other fiscal pressure points
27.
The institutional setting for fiscal policy needs further strengthening. The
priorities in the areas of budgetary planning and implementation include:
•
Fiscal Responsibility Law. The authorities intend to institutionalize fiscal discipline
over the medium term, and discussed with the mission their plans to amend the
existing Finance Administration Act (FAA) (MEP ¶17). This would set legal
guidelines with broad objectives for the primary balance and budgetary design
procedures. Work is already at an advanced stage, but the authorities stressed the
need for wider public consultation and awareness before these amendments can be
finalized.
•
Strengthening public expenditure management. Progress is being made, especially
in reconciling bank accounts, and improving the coverage, reporting and monitoring
of expenditures. All government bank accounts are now captured in the general
ledger. However, further work is needed to establish a robust cash management
system, effectively control commitments, and initiate a medium-term budgeting
framework for ministries.11
•
Strengthening the legal and institutional framework for public debt guarantees.
Guarantees have been used to secure better borrowing terms by statutory bodies and
11
Weaknesses in effectively monitoring the stock of domestic arrears was brought to light by a recent incident
where the government only recently acknowledged a claim for about EC$2 million. The work done by a
contractor had apparently not been up to standards, and the government had failed to record the liability on its
books until the work was completed recently.
- 22 -
are often requested by lenders. However, current procedures for guaranteeing debt are
unsystematic, delinked from the government’s other economic objectives, and offer
few safeguards on the financial soundness of the underlying borrowing. The ministry
of finance, with staff assistance, is working to strengthen this framework. The
framework will involve ascertaining the financial soundness of the borrower and the
borrowing plan, consistency with medium-term debt sustainability, transparency and
parliamentary oversight in granting the guarantee, and monitoring the financial
condition of the borrower for the duration of the guarantee.
Debt restructuring
28.
Staff called for a redoubling of efforts to complete the debt restructuring
process, which has taken an unusually long time. More than a year after the exchange
offer formally closed in June 2004, the issuance of new bonds to all participating creditors
has yet to be completed. The legislative changes that would allow these bonds to be traded
on the Eastern Caribbean Stock Exchange (ECSE) also has yet to be passed by Parliament.
The authorities attributed the delay to technical problems, limited domestic expertise, and
difficulties in soliciting responses from nonparticipating (and some participating creditors).
They committed to: (i) complete the issuance of the new bonds to all participating creditors
shortly; and (ii) present legislative amendments at the next parliamentary sitting (expected in
November) to allow ECSE trading of the bonds (MEP ¶7). The authorities reiterated their
commitment to good-faith efforts to reach a collaborative settlement with the remaining
creditors, and emphasized that they are treating outstanding principal amounts as if they had
been restructured and are continuing to make deposits into an escrow account as payments
fall due. They also noted that in late August they finally received communication from one of
the three remaining large nonparticipating creditors and are hopeful of making further
progress in the coming weeks. Staff cautioned that while payments into the escrow account
underscored the authorities’ positive approach to creditors, it did not preclude the risk of
legal action by creditors as long as arrears are being incurred.
D. Addressing Vulnerabilities
29.
Discussions on policies to reduce vulnerabilities focused on strengthening the
financial system and mitigating the costs of natural disasters.
30.
Notwithstanding some banking system improvements, staff emphasized the need
to monitor closely the recovery in credit growth and the quality of new lending. The
banking system was largely unaffected by the debt restructuring process, and appears broadly
sound (Table 8). At end-June 2005, the capital adequacy ratios of locally incorporated banks
was some 19 percent of risk-weighted assets, and the banking system’s liquidity and
profitability has been on the increase. But there remain concerns about banks ability to assess
credit risk effectively, as nonperforming loans, while declining, are some 21 percent of total
loans. Much of the recent credit expansion has occurred in the “personal loans” and “trade”
categories, and staff queried the extent to which the former had been for business purposes,
- 23 -
and whether this reflected regulatory asymmetries for business versus personal loans. The
authorities noted that some personal loans may well be used for business purposes, but
thought that this likely reflected banks requests for personal collateral. Staff stressed the need
for closer scrutiny on the quality of new lending, and urged the authorities to pass without
delay the revised Banking Act, which would put in place some of the recommendations of
the 2004 ECCU regional FSAP.
31.
The mission also called for steps to address vulnerabilities in the nonbank
financial sector, particularly the credit unions. Poor reporting practices and weak
regulatory oversight have allowed credit union balance sheets to weaken over time, and the
authorities have only started to address this problem in recent months. An onsite inspection
of the Roseau Cooperative Credit Union (RCCU)—the largest credit union—undertaken in
May, raised concerns about the level of nonperforming assets, account handling practices and
the quality of the audit process. The recently established Financial Services Unit (FSU) is
working with the RCCU to address the identified shortcomings, and is shortly also expected
to carry out targeted inspections of the remaining 15 credit unions (MEP ¶10). Additionally,
legislation is required to provide legal authority for the FSU to directly supervise the
nonbank financial sector, including credit unions, money transfer institutions, and the AID
Bank.
32.
Dominica’s high vulnerability to natural disasters and recent experiences in the
region underscore the need for better disaster-preparedness. The November 2004
earthquake and mudslides had a large economic cost—estimated at around 7 percent of
GDP—including through the fiscal accounts. The impact of future natural disasters could be
reduced through better construction standards for roads and buildings, and greater risk
mitigation could also be encouraged. However, improved building codes have not yet been
legislated and not all government buildings and structures are insured. Staff also noted that
the government might want to consider targeting a stronger primary balance, with a view to
putting aside funds to cover the cost of any future natural disasters. The authorities saw merit
in this proposal, but felt that additional fiscal adjustment at this time would be problematic.
Instead, they are looking to participate in initiatives for regional risk pooling of catastrophe
insurance.
V. PROGRAM MODALITIES
33.
Consistent with the increased focus on reinvigorating growth, the authorities
program for 2005/06 has a stronger emphasis on structural reforms. Two measures
envisaged as prior actions for the completion of the fifth review have already been
implemented: parliamentary approval of VAT legislation and Cabinet approval of a plan to
rationalize the wage bill and ensure its consistency with the budgetary envelope. Reflecting
implementation delays, two other structural benchmarks initially envisaged for endSeptember are now only expected to be completed by end-December (MEP Table 2). In the
attached LOI and MEP, the authorities also:
- 24 -
•
establish quantitative performance criteria for the end-December 2005 and end-June
2006 test dates, and indicative targets for end-September 2005 and March 2006;
•
outline their structural reform agenda for the remainder of 2005 and the first few
months of 2006 (Table 9); and
•
request a waiver for the nonobservance of the continuous performance criteria on
external payments arrears.
34.
The authorities also request the extension of repurchase expectations arising in
the period from December 22, 2005 to December 22, 2006 (LOI ¶4). The original
Stand-By Arrangement projected a balance of payments (BOP) deficit of 2.1 percent of GDP
and a current account deficit of 12.9 percent of GDP for 2005. Current projections show
larger deficits of approximately 3.1 percent for the overall balance of the BOP and
19.2 percent (17 percent on a cash basis) for the current account. In light of this and the
fragile nature of the external accounts, staff supports this request. The extension would move
the repurchase expectations totaling SDR 1,268,444 to an obligation basis, with each amount
falling due exactly one year after the expectation date (Table 10).
VI. OTHER ISSUES
35.
Dominica’s statistical databases remains weak, and substantial improvements
are needed to ensure effective surveillance. Dominica participates in the General Data
Dissemination System (GDDS) and their metadata highlights some of the weaknesses and
proposals for improvements within that framework. The mission recommended that priority
be given to improving the quality and timeliness of debt data and more frequent surveys of
living conditions.
36.
The authorities expressed grave concern about the implications of the planned
erosion of banana preferences, and the consequent adverse effects on the economy.
They reiterated their commitment to regional integration through the OECS and CARICOM,
and their intent to continue using CARICOM’s regional negotiating machinery to negotiate
more successfully in international fora. Government officials also indicated a revision of the
tariff regime is underway to ensure the country’s compliance with CARICOM’s harmonized
tariff schedule. In addition, the revision will remove import licensing requirements still in
place.
37.
There is a dearth of data on labor market indicators. The last labor force survey
was carried out in 1999 (although a new one is underway), and there is little information on
incomes. The current labor code is largely outdated, with minimum wage levels well below
prevailing levels. Other broader policy-induced distortions are harder to discern.
- 25 -
VII. PRSP STATUS REPORT
38.
Preparation of the Growth and Social Protection Strategy (GSPS) is nearing
completion. In the attached preparation status report, the authorities note that a draft of
GSPS was circulated for comment at a donors’ conference held in Roseau in June. A revised
draft reflecting these comments is currently being prepared and, after a final round of public
consultations, the document is expected to be presented to Cabinet for adoption later this
year. Staff called on the authorities to finalize the GSPS as soon as possible, including to
help guide new projects under the PSIP. The authorities were confident that the sectoral
strategies currently being developed as well as the FY 2005/06 PSIP are consistent with the
GSPS.
VIII. STAFF APPRAISAL
39.
Dominica has made commendable progress under the PRGF-supported
program. The remarkable turnaround in the economy’s fortunes to a large extent reflects the
strong policies pursued by the authorities. With the confidence these policies have
engendered, economic growth has resumed, financial intermediation has recovered, and tax
revenues have been buoyant. The latter allowed the program’s medium-term primary surplus
objective to be realized sooner than expected.
40.
Staff also welcomes the stronger foundation that is being laid for public finances.
The adoption of VAT and excise tax legislation in early September should allow the
introduction of VAT in March 2006. This will serve to widen the tax base and improve its
structure and efficiency. The government’s recent decision to publish Cabinet decisions on
tax concessions is also a very important step toward improving the transparency of public
finances. Provided amendments to the FAA include firm guidelines on targeting a primary
fiscal surplus consistent with reducing the public debt stock to a prudent level, the scope for
repeating the mistakes that caused debt to explode in the 1990s will have been minimized.
41.
But much remains to be done to sustain the current growth momentum. Public
debt, while trending downward, remains very high. Further, a number of threats to public
finance have yet to be addressed, including from the large projected deficit of the social
security system. The manner in which these issues are addressed will have a bearing on the
durability of the economic recovery and sustainability of public finances. Moreover, these
issues have to be addressed against the ever present specter of exogenous shocks, including
from natural disasters. Key aspects of the Article IV consultation accordingly focused on
policies to remove the impediments to growth and address the remaining threats to public
finances.
42.
Removing bottlenecks that are impeding higher private investment has to
become a central plank of the government’s growth agenda. Mindful of the limited
implementation capacity, staff believes that the following reforms should be given priority.
First, the Electricity Supply Act should be amended at the earliest opportunity to allow new
- 26 -
entrants into the market. Second, the enabling environment for private sector investment
needs to be enhanced, including by rationalizing the operations of the three investment
promotion agencies with a view to creating a one-stop investment promotion center. Third,
the government should at the earliest opportunity adopt a program to modernize and ensure
comprehensive coverage of land registration. In the long haul, such reforms will do more to
stimulate private sector led growth than seeking to attract investment through tax incentives.
In this context, the recent rise in the number of discretionary tax incentives is very
disappointing, and the use of such incentives should be sharply curtailed going forward.
43.
Fiscal policy needs to remain geared towards further debt reduction. Staff
welcomes the 2005/06 budget which targets a primary surplus that appropriately balances
further debt reduction with the need to reinstate the 5 percent cut in public wages introduced
in 2003/04. Looking ahead, it will be important for the government to continue targeting a
primary surplus of at least 3 percent of GDP to ensure a reduction in the debt stock to more
manageable levels. Aiming to reduce debt to 60 percent of GDP over the next decade would
be highly desirable. The efficiency of government spending also needs to be improved by
further streamlining of public sector employment and limiting the PSIP to well-targeted
projects with high returns. Staff strongly welcomes the government’s objective of a smaller,
more efficient and better paid public service. But to be consistent with further medium-term
reductions in the wage bill, the structure and functions of ministries and departments need to
be rationalized aggressively.
44.
The threat of the large unfunded social security liabilities jeopardizing debt
sustainability needs to be addressed decisively and promptly. The time when DSS will
start to incur deficits is not far off. The sooner reforms are put in place, the more gradual and
less abrupt these reforms will be. Consequently, staff urges the authorities to expedite the
review and implementation of the reform options for addressing the looming social security
system deficits. Given the country’s vulnerability to natural disasters, international
diversification of DSS’s portfolio should be initiated at the earliest opportunity.
45.
With the renewed political mandate, the government has an unparalleled
window of opportunity to advance reforms. Reforms of the last few years have addressed
the adverse effects on output growth stemming from the government’s large fiscal deficits
and arrears. The government should move quickly to remove the remaining impediments to
higher economic growth and reduce the threats to public finance. Vulnerabilities in the
financial sector also need to be addressed quickly by strengthening regulatory oversight of
nonbank institutions.
46.
The current monetary and exchange rate arrangement has served Dominica
well. Staff fully concurs with the authorities’ assessment that the framework needs to remain
the bulwark around which economic policies should be based. The regional currency board
arrangement has provided the country with a remarkable period of exchange rate and price
stability even in the presence of frequent and large adverse shocks. The depreciation of the
- 27 -
U.S. dollar in recent years has helped move the real exchange rate well within a manageable
range.
47.
Dominica continues to make progress in the provision of core statistics to the
Fund. However, data deficiencies continue to hamper surveillance purposes. Staff
encourages the authorities to improve data quality, in particular on national accounts and
government finances.
48.
Staff recommends completion of the financing assurances review. This is
warranted in light of the authorities’ good faith efforts in seeking collaborative settlements
with the remaining private nonparticipating creditor and best efforts to reach agreement with
the remaining bilateral creditors, willingness to continue depositing payments into an escrow
account, as well as the strong reform agenda it is pursuing. While risks to Fund resources
will remain until the debt restructuring process is completed and all external arrears are
eliminated, the critical role of Fund support for the success of the authorities’ program is
further justification for the completion of the financing assurances review.
49.
Finally, staff supports:
•
Granting the requested waiver for the nonobservance of the continuous
performance criterion on the nonaccumulation of external payments arrears in light of
the minor and temporary nature of the deviation.
•
The authorities’ request to extend the repurchase expectations. Despite the recent
improvement in economic conditions, Dominica’s external position remains weak.
Repayment on an expectation basis of the purchases made under the 2002 SBA would
impose undue hardship and heighten risks to the current PRGF arrangement.
•
The conclusion of the fifth review as program implementation has been solid. Allbut-one performance criteria under the arrangement have been observed, most by
large margins. While significant risks remain, the authorities’ commitment to
implementing the policies envisaged under the program and thus address these should
help maintain a satisfactory performance.
50.
It is recommended that the next Article IV consultation with Dominica be held under
the 24-month cycle, in accordance with the provisions of Decision No. 12794-(02/76) of
July 15, 2002.
- 28 -
Table 1. Dominica: Selected Economic and Social Indicators, 2001–2006
2001
2002
2003
2004
Prog. 1/
2005
Proj.
Prog.
2006
(Annual percent change, unless otherwise specified)
Output and prices
Real GDP (factor cost)
GDP deflator (factor cost)
Nominal GDP (at factor cost)
Nominal GDP at market prices
Consumer prices (end of period)
Money and credit
Net foreign assets of the banking system 2/
Net domestic assets of the banking system 2/
Of which
Net credit to the nonfinancial public sector 2/
Credit to the private sector 2/
Liabilities to the private sector (M2)
Balance of payments
Merchandise exports, f.o.b.
Merchandise imports, f.o.b.
Real effective exchange rate
(end-of-period; depreciation -) 3/
-4.2
1.2
-3.0
-2.7
1.1
-4.7
-0.4
-5.1
-3.7
0.4
0.0
1.7
1.7
2.4
2.9
3.5
1.2
4.7
5.0
0.8
2.5
1.5
4.1
3.9
1.5
3.1
1.5
4.5
4.3
1.5
3.0
1.5
4.5
4.4
1.5
6.6
0.9
19.3
-10.8
17.3
-16.4
8.1
-2.1
4.1
1.4
4.1
1.9
5.5
0.6
5.6
-3.1
7.4
-5.4
-1.3
8.5
-4.3
-2.3
1.0
-5.1
4.3
5.9
0.1
4.8
5.5
0.2
5.1
6.0
-1.7
4.1
6.1
-18.9
-11.3
-1.8
-11.5
-6.0
9.3
3.0
13.5
6.9
3.7
5.2
8.6
5.0
4.0
3.7
-6.3
-6.7
-7.0
…
-3.5
…
41.0
111.8
-33.6
35.0
1.4
42.2
126.9
-46.7
20.9
-25.7
45.2
131.6
-42.4
32.7
-9.7
44.5
137.8
-54.3
45.4
-8.8
46.7
143.2
-51.8
43.6
-8.2
(In millions of U.S. dollars)
Merchandise exports, f.o.b.
Merchandise imports, f.o.b.
Current account balance
Capital account balance 4/
Overall balance
44.4
115.7
-48.9
50.3
1.5
43.6
102.4
-34.7
46.9
12.1
(In percent of GDP, unless otherwise specified)
Central government 5/
Savings
Of which
Primary
Grants
Capital expenditure and net lending
Primary balance
Overall balance
-3.0
-0.6
8.7
7.6
8.1
7.4
8.2
2.4
1.7
5.7
-2.1
-8.6
5.1
4.5
5.1
-1.6
-5.4
14.6
8.8
10.1
5.6
-1.3
13.8
5.9
8.5
4.4
-0.6
14.0
6.2
11.0
3.0
-2.5
13.1
8.1
10.1
3.0
-2.5
13.1
8.1
10.1
3.0
-1.7
Nonfinancial public sector debt (gross)
Total
External
Domestic
93.7
67.5
26.2
127.2
79.9
47.3
130.6
84.4
46.2
116.7
81.2
35.5
...
...
...
109.1
81.1
28.0
103.9
77.6
26.3
-18.7
-13.8
-13.0
-17.2
-15.2
-19.2
-17.6
10.9
4.5
6.4
11.8
4.6
7.1
19.5
12.8
6.8
20.8
14.1
6.7
11.2
5.3
5.9
15.9
8.2
7.6
13.1
7.3
5.8
706.8
680.5
697.1
731.7
754.2
763.5
796.9
30.4
43.6
44.0
33.6
34.0
38.9
41.0
External sector
Current account balance
External public debt service 6/
Amortization
Interest
Memorandum items:
Nominal GDP at market prices (EC$ millions)
Calendar year
Net international reserves
(U.S. dollars millions; end-of-period) 7/
Sources: Dominican authorities; Eastern Caribbean Central Bank (ECCB); and Fund staff estimates and projections.
1/ IMF Country Report No. 05/117.
2/ Change relative to the stock of M2 at the beginning of the period. From 2003, transactions with the IMF are included as transactions
of the monetary authorities.
3/ Figure for 2005 is for the 12-month period to June 2005.
4/ Including errors and omissions.
5/ These data are presented on a fiscal year (July–June) basis. Figures shown for a given calendar year relate to the fiscal year beginning on
July 1 of that year.
6/ On a due basis (i.e., before restructuring). In percent of exports of goods and nonfactor services.
7/ Imputed reserves at the ECCB until 2001. From 2002, transactions with the IMF are included as transactions of the monetary authorities.
- 29 -
Table 2. Dominica: Summary Accounts of the Central Government, 2000/01–2005/06 1/
2000/01
2001/02
2002/03
2003/04
Prog. 2/
Prov.
2004/05 3/
Prog. 2/ Rev. Prog.
2005/06
(In millions of Eastern Caribbean dollars)
Total revenue and grants
Current revenue
Capital revenue
Grants
271.5
200.5
3.0
68.0
209.7
197.1
0.9
11.8
224.1
191.9
1.3
30.9
285.9
221.8
1.0
63.2
291.3
229.2
2.5
59.6
292.0
245.7
2.0
44.3
287.0
237.2
2.6
47.3
294.2
229.3
1.5
63.4
Total expenditure
Current expenditure
Wages and salaries 4/
Interest
Others
Capital expenditure and net lending
350.3
230.1
116.2
36.0
77.9
120.2
269.3
229.7
116.5
36.9
76.3
39.6
261.3
226.6
116.1
37.6
72.8
34.7
295.2
223.1
104.2
41.7
77.2
72.1
317.5
226.7
102.7
43.8
80.1
90.9
296.3
232.9
102.0
43.9
87.0
63.5
306.4
222.2
99.7
42.4
80.1
84.2
313.5
234.8
106.5
43.0
85.3
78.7
Overall balance
-19.3
-78.8
-59.5
-37.2
-9.3
-26.3
-4.3
-19.3
Statistical discrepancy 5/
18.7
8.2
-11.5
7.7
-2.7
-7.0
0.0
0.0
Financing
Net foreign financing
Disbursements
Amortization
Other including rescheduling
Net domestic financing
Bank
Nonbank
Other including rescheduling
60.1
42.7
...
...
...
17.4
11.2
6.2
0.0
51.3
25.6
31.9
6.3
0.0
25.7
16.3
9.5
0.0
48.7
44.9
47.7
6.5
3.8
3.8
-6.9
10.7
0.0
1.6
47.3
78.4
37.2
6.1
-45.7
-41.4
-8.8
4.6
29.0
16.9
20.9
43.2
39.2
12.1
-0.2
1.6
10.7
11.3
19.6
24.5
43.2
38.3
-8.3
-15.3
-3.2
10.2
19.3
12.5
11.5
20.2
21.2
6.8
-2.9
0.0
9.7
19.3
22.3
11.8
20.4
30.8
-3.0
-13.6
0.0
10.6
(In percent of GDP)
Total revenue and grants
Current revenue
Capital revenue
Grants
37.6
27.8
0.4
9.4
30.2
28.4
0.1
1.7
32.7
28.0
0.2
4.5
40.0
31.0
0.1
8.8
39.4
31.0
0.3
8.1
39.1
32.9
0.3
5.9
37.4
30.9
0.3
6.2
37.7
29.4
0.2
8.1
Total expenditure
Current expenditure
Wages and salaries 4/
Interest
Others
Capital expenditure and net lending
48.5
31.9
16.1
5.0
10.8
16.6
38.8
33.1
16.8
5.3
11.0
5.7
38.2
33.1
17.0
5.5
10.6
5.1
41.3
31.2
14.6
5.8
10.8
10.1
42.9
30.6
13.9
5.9
10.8
12.3
39.6
31.1
13.6
5.9
11.6
8.5
39.9
28.9
13.0
5.5
10.4
11.0
40.2
30.1
13.7
5.5
10.9
10.1
Overall balance
-10.9
-8.6
-5.4
-1.3
-3.5
-0.6
-2.5
-2.5
Statistical discrepancy 5/
2.6
1.2
-1.7
1.1
-0.4
-0.9
0.0
0.0
Financing
Net foreign financing
Disbursements
Amortization
Other including rescheduling
Net domestic financing
Bank
Nonbank
Other including rescheduling
8.3
5.9
...
...
...
2.4
1.5
0.9
0.0
7.4
3.7
4.6
0.9
0.0
3.7
2.3
1.4
0.0
7.1
6.6
7.0
1.0
0.6
0.6
-1.0
1.6
0.0
0.2
6.6
11.0
5.2
0.9
-6.4
-5.8
-1.2
0.6
3.9
2.3
2.8
5.8
5.3
1.6
0.0
0.2
1.4
1.5
2.6
3.3
5.8
5.1
-1.1
-2.0
-0.4
1.4
2.5
1.6
1.5
2.6
2.8
0.9
-0.4
0.0
1.3
2.5
2.9
1.5
2.6
3.9
-0.4
-1.7
0.0
1.4
42.9
5.9
5.3
1.3
-3.3
30.2
4.3
-3.0
0.7
-2.1
4.0
0.6
-0.6
0.6
-1.6
11.8
1.7
8.7
5.8
5.6
34.7
4.7
8.4
6.6
2.0
22.8
3.0
7.6
7.9
4.4
39.5
5.1
8.1
7.8
3.0
17.9
2.3
7.4
5.0
3.0
722.4
693.7
684.8
714.4
740.0
747.6
767.5
780.2
Memorandum items:
Capital expenditure less total grants
In EC$ million
In percent of GDP
Savings (incl. grants)
Primary savings (before grants)
Primary balance (incl. grants) 6/
Nominal GDP at market prices (EC$ millions)
Sources: Ministry of Finance; and Fund staff estimates and projections.
1/ Fiscal years beginning July 1.
2/ IMF Country Report No. 05/117.
3/ On a commitment basis.
4/ 2005/06 includes a reclassification of EC$2.3 million (0.3 percent of GDP) to other expenditure, reflecting a transfer of teachers
from the government payroll to that of the State College.
5/ Difference between identified financing below-the-line and overall balance above-the-line. Projected discrepancy for
FY 2004/2005 equals realized discrepancy through end-May 2005.
6/ Computed using overall deficit measured from below-the-line.
- 30 -
Table 3. Dominica: Balance of Payments 2002–2010
2002
2003
Prel. Prog. 1/
Proj.
2005
2004
Prog.
2006
Proj.
2007
Proj.
2008
Proj.
2009
Proj.
2010
(In millions of U.S. dollars)
Current account balance
Trade balance
Exports (f.o.b.) 2/
Of which
Bananas
Imports (f.o.b.)
Services balance
Exports of services
Travel
Other
Imports of services
Net income
Interest payments (public sector)
Other income
Net current transfers
Private
Public
-34.7
-58.7
43.6
-33.6
-70.8
41.0
-46.7
-84.6
42.2
-42.4
-86.4
45.2
-54.3
-93.3
44.5
-51.8
-96.5
46.7
-50.5
-98.4
49.1
-48.9
-100.2
51.5
-47.6
-102.4
54.1
-45.9
-104.6
56.8
8.1
102.4
26.0
79.7
45.7
34.0
53.7
-18.4
-8.8
-9.6
16.4
12.6
3.8
5.9
111.8
32.8
77.3
52.3
25.0
44.6
-12.1
-8.0
-4.1
16.6
12.4
4.2
7.2
126.9
40.0
86.3
60.1
26.2
46.3
-21.8
-8.6
-13.2
19.8
18.4
1.4
...
131.6
47.8
107.2
68.7
38.5
59.4
-20.9
-9.0
-11.9
17.1
16.9
0.2
7.2
137.8
45.1
95.5
65.6
29.8
50.3
-22.0
-10.7
-11.3
15.9
17.0
-1.1
7.5
143.2
47.3
99.6
68.5
31.1
52.3
-20.2
-8.4
-11.8
17.6
17.7
-0.1
7.8
147.5
50.1
104.0
71.5
32.5
53.9
-20.6
-8.3
-12.3
18.4
18.5
-0.1
8.2
151.8
53.1
108.5
74.6
33.9
55.4
-20.9
-8.1
-12.9
19.2
19.3
-0.1
8.5
156.5
56.2
113.3
77.9
35.4
57.1
-21.4
-8.0
-13.4
20.0
20.1
-0.1
8.9
161.4
59.3
118.3
81.3
37.0
59.0
-21.5
-7.5
-14.0
20.9
21.0
-0.1
Capital and financial account
Capital account
Public capital transfers
Private capital transfers
Financial account
Public sector
Budgetary flows (net)
Disbursements
Repayments
Nonbudgetary flows (net)
Private sector
Direct investment
Commercial banks
Other private flows
32.1
20.5
17.7
2.8
11.6
25.8
25.0
30.7
5.7
0.8
-14.1
11.4
-24.1
-1.5
22.4
18.8
15.9
2.9
3.7
8.9
8.9
24.0
15.1
0.0
-5.2
19.8
-33.9
8.8
23.0
26.8
23.8
3.0
-3.8
0.2
0.2
18.3
18.1
0.0
-4.0
18.1
-26.9
4.8
32.7
22.6
19.6
3.0
10.1
-0.3
-0.3
7.8
8.0
0.0
10.3
21.1
-9.0
-1.8
45.4
19.2
16.3
2.8
26.3
-1.3
-1.3
10.2
11.5
0.0
27.6
21.1
-3.6
10.0
43.6
26.7
23.7
3.0
16.9
-6.2
-6.2
4.4
10.7
0.0
23.1
21.7
-10.5
11.9
50.4
28.1
25.0
3.1
22.3
-6.7
-6.7
4.6
11.4
0.0
29.1
22.4
-6.3
13.0
47.5
29.3
26.1
3.2
18.2
-6.9
-6.9
4.8
11.7
0.0
25.1
23.0
-7.9
10.0
43.8
30.6
27.3
3.4
13.2
-9.4
-9.4
5.0
14.5
0.0
22.6
23.7
-5.0
3.9
52.1
32.0
28.4
3.5
20.1
-4.8
-4.8
5.3
10.0
0.0
24.9
24.4
-2.5
3.0
Errors and omissions
14.7
12.5
-2.1
0.0
0.0
0.0
0.0
0.0
0.0
0.0
Overall balance
12.1
1.4
-25.7
-9.7
-8.8
-8.2
-0.1
-1.3
-3.8
6.2
Overall financing
-12.1
-1.4
25.7
9.7
8.8
8.2
0.1
1.3
3.8
-6.2
Net international reserves
Gross reserves (increase = -)
IMF reserve liabilities (purchase = +)
-12.1
-15.1
3.0
-1.4
-6.2
4.8
10.3
9.4
0.9
-0.4
-3.5
3.1
-5.3
-8.5
3.2
-2.1
-3.9
1.8
-4.9
-3.1
-1.8
-3.2
-2.6
-0.6
-3.5
-2.7
-0.7
-3.9
-2.9
-1.1
0.0
0.0
15.4
10.1
14.1
10.4
5.0
4.5
7.2
-2.3
Exceptional financing
(In percent of GDP)
Memorandum items:
Current account balance
Current account balance including
net capital transfers
External public debt service (as a percent of
exports of goods and nonfactor services)
Amortization
Interest
-13.8
-13.0
-17.2
-15.2
-19.2
-17.6
-16.4
-15.2
-14.2
-13.1
-5.6
-5.7
-7.3
-7.1
-12.4
-8.5
-7.3
-6.1
-5.0
-4.0
11.8
4.6
7.1
19.5
12.8
6.8
20.8
14.1
6.7
11.2
5.3
5.9
15.9
8.2
7.6
13.1
7.3
5.8
12.8
7.4
5.4
12.4
7.3
5.0
13.4
8.6
4.8
10.0
5.7
4.3
Sources: Dominican authorities; Eastern Caribbean Central Bank (ECCB); and Fund staff estimates and projections.
1/ IMF Country Report No. 05/117.
2/ Includes stores and bunkers.
- 31 -
Table 4. Dominica: Summary Accounts of the Banking System, 2002–2006
2002
2003
2004
Prog. 1/
2005
Proj.
Proj.
2006
I. Consolidated Banking System and Monetary Authorities
(In millions of Eastern Caribbean dollars, end of period)
Net foreign assets
193.8
289.0
333.7
357.7
357.5
391.6
Net domestic assets
Net credit to the nonfinancial public sector
Of which
Central government
Net credit to nonbank financial institutions
Credit to the private sector
Other items (net) 2/
355.4
74.8
265.5
51.1
253.6
23.0
261.7
23.6
264.8
24.1
268.8
13.6
64.2
-46.6
433.2
-106.1
55.9
-81.8
420.6
-124.5
45.6
-75.9
444.7
-138.2
46.6
-78.8
472.9
-155.9
50.7
-79.1
474.7
-154.8
37.4
-82.6
500.2
-162.5
549.2
554.5
587.4
619.5
622.4
660.4
Broad money 3/
II. Operations of the Monetary Authorities
Imputed net international reserves
Net domestic assets
Monetary base
Currency in circulation
Commercial bank reserves
117.8
118.7
90.8
91.8
105.0
110.8
12.1
7.0
26.0
27.9
18.7
20.5
129.9
35.5
94.4
125.7
34.2
91.5
116.8
37.6
79.2
119.7
38.9
80.8
123.7
39.0
84.7
131.3
40.7
90.6
242.9
265.9
252.5
280.8
III. Commercial Banks
Net foreign assets
Net claims on ECCB
Net domestic assets
Net credit to the nonfinancial public sector
Net credit to nonbank financial institutions
Credit to the private sector
Other (net)
Private sector deposits 3/
79.0
170.4
98.2
85.6
73.8
78.8
78.9
84.4
336.6
53.4
-46.6
433.2
-103.5
264.3
26.3
-81.8
420.6
-100.7
233.1
-10.8
-75.9
444.7
-125.0
235.8
-16.0
-78.8
472.9
-142.2
251.9
-15.9
-79.1
474.7
-127.7
254.5
-29.0
-82.6
500.2
-134.1
513.7
520.3
549.8
580.6
583.4
619.7
5.7
5.7
5.9
6.3
6.1
5.5
6.7
12.7
6.0
5.4
6.2
6.1
IV. Consolidated Banking System
(Annual percentage change)
Credit to the private sector
Private sector deposits
Broad money
-1.4
7.6
8.5
-2.9
1.3
1.0
(Contributions to liquidity growth) 4/
Net foreign assets
Net domestic assets
Net credit to the nonfinancial public sector
Credit to the private sector
Memorandum items:
Interest rates 5/
Deposits (three-month time—maximum rate)
Lending: Minimum rate
Maximum rate
19.3
17.3
8.1
4.1
4.1
5.5
-10.8
-5.4
-1.3
-16.4
-4.3
-2.3
-2.1
-5.1
4.3
1.4
0.1
4.8
1.9
0.2
5.1
0.6
-1.7
4.1
6.0
8.5
20.8
6.0
8.0
18.2
3.0
7.5
18.2
…
…
…
…
…
…
…
…
…
Sources: Eastern Caribbean Central Bank (ECCB); and Fund staff estimates and projections.
1/ Program figures are as shown in IMF Country Report No. 05/117. From 2002, transactions with the IMF are
included as transactions with the monetary authorities.
2/ Includes interbank float.
3/ Including foreign currency deposits.
4/ Change relative to broad money at the beginning of the period.
5/ Commercial banks; end-of-period rates, percent per annum.
4.1
4.1
48.7
-16.7
0.0
0.0
4.0
15.0
6.7
27.0
-3.0
12.3
55.4
-13.3
Not met
Met
2.9
3.2
4.0
25.3
0.2
15.0
6.0
54.0
3.0
0.0
0.0
6.0
Met
3.4
Not met
II. Indicative Targets
0.0
0.0
6.0
4.1
-2.0
51.5
14.7
(In millions of U.S. dollars)
15.0
3.0
54.0
3.0
8.2
6.7
3.4
15.2
103.6
-19.6
15.2
103.6
-19.6
12.1
12.9
12.1
...
...
2.6
10.9
8.0
2.5
11.7
1/ Cumulative amounts from June 30, 2004. All variables and adjustors that apply are defined in the Technical Memorandum of Understanding.
2/ These performance criteria will be monitored on a continuous basis.
3/ External arrears that were known at the time of the Executive Board discussions on August 4, 2004 and on March 7, 2005, were waived.
27.3
116.5
-7.4
(In millions of Eastern Caribbean dollars)
...
...
1.1
11.8
2.6
1.7
3.2
Sources: Dominican authorities; Eastern Caribbean Central Bank (ECCB); and Fund staff estimates and projections.
Central government primary savings
48.7
Central government revenues
0.0
Central government and central government guaranteed
external payments arrears 2/ 3/
-16.7
0.0
Net changes in the outstanding stock of contracted or
guaranteed short-term external debt of the central
government (with maturity of less than one year) 2/
Central government overall balance
4.0
15.0
Disbursement of central government or central
government guaranteed external nonconcessional debt
with maturity of at least one year
Net changes in central government arrears to private
domestic parties
3.0
27.0
Central government wage bill
Banking system net credit to central government
-3.0
Central government primary balance
I. Performance Criteria
29.6
160.3
-25.6
0.0
0.0
8.0
15.0
0.0
78.5
11.0
29.6
160.3
-25.6
0.0
0.0
8.0
15.0
3.7
78.5
11.0
42.2
175.4
-11.9
Met
Met
4.4
4.5
-6.7
77.4
23.8
12.6
15.1
13.7
...
...
3.6
10.5
10.5
1.1
12.8
35.4
210.6
-32.0
0.0
0.0
10.0
15.0
0.0
104.2
14.4
35.4
210.6
-37.9
0.0
0.0
10.0
15.0
4.7
104.2
8.5
58.7
245.1
-11.3
Not met
Met
5.3
3.8
-15.3
102.0
32.6
23.3
34.6
26.6
...
...
4.7
11.2
20.0
2.2
24.1
Program Adjusted
Margin (+)/ Program Adjusted
Margin (+)/ Program Adjusted
Prov. Margin (+
PC
PC
Actual Excess (-)
IT
IT
Actual Excess (-)
PC
PC
Actual Excess (-)
Mar. 31, 2005 1/
June. 30, 2005 1/
Dec. 31, 2004 1/
(In millions of Eastern Caribbean dollars)
Program Adjusted
Margin (+)/
PC
PC
Actual Excess (-)
Sept. 30, 2004 1/
Table 5. Dominica: Quantitative Performance Criteria (PC) and Indicative Targets (IT)
- 32 -
Benchmark
Approval of the 2005/06 budget, with a primary balance target consistent with the PRGF program.
Sources: Dominican authorities; and IMF Country Report No. 05/117.
Cabinet approval of action plans for DEXIA and NDC, addressing their reorganization and cost effectiveness.
Benchmark
Benchmark
Establish legislative basis for the FSU to supervise insurance companies, and regulate all NBFIs and AID Bank.
Other reforms
Benchmark
On-site inspection of Roseau Credit Union and follow-up on findings/remedial measures.
Financial sector reforms
Benchmark
Finalize proposals for amending the Finance Administration Act, to implement a Fiscal Responsibility Law.
Category
Table 6. Dominica: Structural Benchmarks and Status of Structural Reforms
End-September 2005
End-September 2005
June 2005
August 2005
July 2005
Target Date or
Completion Date
Pending
Ongoing
Completed
Completed
Completed
Status
- 33 -
93.7
67.5
26.2
Est.
2004
0.0
1.7
3.5
1.2
(Annual percent change)
2003
2.5
1.5
Prog. 1/
2005
127.2
79.9
47.3
-5.6
-7.5
1.8
-1.4
1.4
15.3
15.3
0.0
5.6
1.9
13.4
20.9
7.5
130.6
84.4
46.2
-5.7
-3.5
-2.3
4.4
1.5
13.8
19.7
5.9
7.8
1.6
16.0
25.4
9.4
116.7
81.2
35.5
-7.3
-1.0
-6.3
8.8
2.0
10.8
21.6
10.8
9.7
2.0
17.1
28.9
11.8
1/ IMF Country Report No. 05/117.
2/ Calculated using the external current account including net external capital transfers.
...
...
...
-7.1
-3.0
-4.0
9.0
1.0
5.0
15.0
10.0
12.1
1.0
9.0
22.1
13.1
(In percent of GDP, unless otherwise specified)
-4.7
-0.4
2002
Sources: Dominican authorities; Eastern Caribbean Central Bank (ECCB); and Fund staff estimates and projections.
86.2
56.4
29.8
Memorandum items:
Nonfinancial public sector debt
External
Domestic
-11.8
-11.5
-0.3
1.0
2.6
10.0
1.8
1.9
8.3
-15.7
-14.8
-0.9
13.6
3.6
10.7
4.3
10.3
15.3
3.2
9.1
12.0
3.7
25.4
15.0
-4.2
1.2
2001
27.7
18.6
1.4
0.6
Savings investment balance
Public savings investment
Private savings investment
Gross national saving 2/
Public
Of which
Central government
Rest of public sector
Private
Gross domestic investment
Public
Of which
Central government
Rest of public sector
Private
Savings and investment
National income and prices
GDP at constant (1990) prices
Implicit GDP deflator (factor cost)
2000
109.1
81.1
28.0
-12.4
-1.5
-10.9
8.2
0.3
4.1
12.5
8.4
9.7
0.3
15.0
24.9
9.9
3.1
1.5
Proj.
103.9
77.6
26.3
-8.5
-2.1
-6.4
8.3
0.3
9.6
18.2
8.6
10.4
0.3
16.0
26.7
10.7
3.0
1.5
Proj.
2006
Table 7. Dominica: Medium-Term Macroeconomic Framework, 2000–2010
99.5
72.9
26.6
-7.3
-1.6
-5.6
8.8
0.3
11.4
20.4
9.0
10.4
0.3
17.0
27.7
10.7
3.0
1.5
Proj.
2007
95.3
68.5
26.7
-6.1
-1.4
-4.7
9.0
0.3
12.3
21.6
9.2
10.4
0.3
17.0
27.7
10.7
3.0
1.5
Proj.
2008
91.1
64.2
26.9
-5.0
-1.2
-3.8
9.2
0.3
13.2
22.6
9.5
10.4
0.3
17.0
27.7
10.7
3.0
1.5
Proj.
2009
87.1
58.7
28.4
-4.0
-1.0
-2.9
9.4
0.3
14.1
23.7
9.6
10.4
0.3
17.0
27.7
10.7
3.0
1.5
Proj.
2010
- 34 -
-7.9
1.4
-19.7
18.8
29.0
16.6
56.4
105.1
4.3
3.1
2.7
4.8
0.6
8.2
17.4
7.0
40.0
33.3
30.8
27.4
6.4
5.3
-16.9
-9.5
-18.7
19.2
30.4
16.2
67.5
147.1
6.4
4.5
2.7
3.7
7.4
-3.2
22.6
6.8
30.2
26.2
35.4
34.1
6.4
5.3
2001
2.7
-5.8
-13.8
18.6
43.6
21.4
79.9
163.4
7.1
4.6
2.7
-6.3
8.5
-1.4
19.2
7.0
36.7
32.6
34.1
32.9
6.4
6.0
2002
-4.0
0.2
-13.0
13.5
44.0
21.4
84.4
184.2
6.8
12.8
2.7
-6.7
1.0
-2.9
21.7
7.6
34.8
30.1
28.5
28.1
6.4
3.5
2003
5.9
5.7
22.5
7.3
32.2
...
23.0
23.0
6.4
4.9
2004
8.7
10.8
-17.2
7.7
33.6
15.5
81.2
171.1
6.7
14.1
2.7
-7.0
1/ Figure for 2005 is the provisional data for June 2005.
2/ Treasury bill rate adjusted by end-of-period inflation.
3/ Includes errors and omissions.
4/ Imputed reserves at the ECCB until 2001. From 2002, transactions with the IMF are included as transactions of the monetary authorities.
5/ Refers to public sector debt.
Sources: Eastern Caribbean Central Bank (ECCB); and Fund staff estimates and projections.
External indicators
Exports of goods and services (percent change, 12-month basis in U.S. dollars)
Imports of goods and services (percent change, 12-month basis in U.S. dollars)
Current account balance
Capital and financial account balance 3/
Net official reserves (in millions of U.S. dollars, end of period) 4/
Net reserves to broad money (percent, end of period) 3/
Public sector external debt
External debt (end of period) to exports of goods and services (percent) 5/
External interest payments to exports of goods and services (percent) 5/
External amortization payments to exports of goods and services (percent) 5/
Exchange rate (per U.S. dollar, end of period)
REER appreciation (end of period; depreciation -)
Financial indicators
Broad money (percent change, 12-month basis)
Private sector credit (percent change, 12-month basis)
Unsatisfactory assets/total loans 1/
Provision for loan losses/total loans 1/
General and specific provisions for loan losses/unsatisfactory assets 1/
Specific provisions for loan losses/unsatisfactory assets 1/
Total capital/risk weighted assets (locally incorporated banks) 1/
Tier 1 capital/risk weighted assets (locally incorporated banks) 2/
Three-month treasury bill rate (end of period)
Three-month treasury bill rate (real) 2/
2000
(In percent of GDP, unless otherwise indicated)
Table 8. Dominica: Financial and External Vulnerability Indicators, 2000–2005
8.8
8.6
-19.2
16.1
38.9
16.9
81.1
163.9
7.6
8.2
2.7
-3.5
6.0
6.7
20.5
6.0
29.1
...
18.7
18.7
...
...
Proj.
2005
- 35 -
7.688
3.468
1.785
1.683
3.367
1.683
1.683
11.148
11.890
2005
March 22
October 14
2006
March 15
August 15
Total
Memorandum item:
Quota (in millions)
8.200
2.322
1.161
1.161
2.392
1.231
0.308
100.0
93.8
14.2
28.3
14.2
14.2
29.2
15.0
3.8
7.5
3.8
28.8
28.8
As Percent
of Quota
Seventh review under the PRGF; and
end-June 2006 performance criteria.
Sixth review under the PRGF; and
end-December 2005 performance criteria.
Fifth review under the PRGF; and
end-June 2005 performance criteria.
Third and fourth reviews under the PRGF; end-June
2004, end-September 2004, and end-December 2004
performance criteria.
Second review under the PRGF; and
end-March 2004 performance criteria
First review under the PRGF;
end-December 2003 performance criteria; and
adoption of prior action.
Board approval of PRGF; and adoption of
prior actions
Conditions
1/ For illustrative purposes only, SDR amounts have been converted into U.S. dollars at an US$/SDR exchange rate of 1.45.
Source: Fund staff estimates and projections.
1.161
0.447
August 10
0.616
0.308
0.893
0.447
2004
March 31
2.358
2.358
3.419
3.419
2003
December 29
Disbursements (in millions)
US$ 1/
SDR
Table 9. Dominica: Schedule of Disbursements Under the PRGF Arrangement
- 36 -
- 37 -
Table 10. Dominica: Indicators of Capacity to Repay the Fund, 2003–2010
Projections
2003
2004
2005
2006
2007
2008
2009
2010
(In millions of SDRs, unless otherwise specified)
Obligations from existing drawings
Repurchases:
Expectation basis
0.00
0.00
0.29
2.29
0.38
0.00
0.50
0.50
Obligation basis
0.00
0.00
0.26
1.10
1.23
0.38
0.50
0.72
Charges/interest under expectations/obligations
schedule for repurchases:
Expectation basis
0.05
0.09
0.13
0.10
0.04
0.04
0.03
0.03
Obligation basis
0.05
0.09
0.13
0.13
0.08
0.05
0.04
0.03
Fund repurchases and charges (obligation basis) 1/
In millions of SDRs
On existing credits
0.05
0.09
0.40
1.24
1.33
0.45
0.55
0.77
0.05
0.09
0.39
1.23
1.31
0.43
0.54
0.75
0.72
Of which
0.00
0.00
0.26
1.10
1.23
0.38
0.50
In millions of U.S. dollars
Repurchases on an obligation basis
0.07
0.13
0.59
1.81
1.94
0.65
0.81
1.12
In percent of exports of goods and services
0.06
0.10
0.41
1.23
1.26
0.41
0.48
0.67
In percent of debt service 2/
0.30
0.50
2.59
8.74
9.04
3.20
3.49
6.02
In percent of quota
0.61
1.09
4.82
15.16
16.20
5.45
6.77
9.36
In percent of net international reserves 3/
0.16
0.39
1.72
4.80
4.70
1.50
1.76
2.44
6.5
Fund credit outstanding 1/
In millions of SDRs
5.3
5.9
8.1
9.3
8.1
7.7
7.2
In millions of U.S. dollars
7.5
8.8
12.0
13.5
11.8
11.2
10.5
9.4
In percent of exports of goods and services
6.3
6.8
8.4
9.2
7.7
7.0
6.2
5.6
32.3
33.0
53.0
65.4
54.9
55.1
45.2
50.7
In percent of debt service 2/
In percent of quota
65.0
72.5
98.5
113.4
98.4
93.7
87.6
78.8
In percent of net international reserves 3/
17.0
26.2
35.1
35.9
28.6
25.7
22.8
20.5
118.3
128.6
143.0
146.9
153.6
160.6
167.8
167.8
23.1
26.7
22.6
20.7
21.4
20.4
23.2
18.6
Memorandum items:
Exports of goods and services (millions of U.S. dollars)
Debt service (millions of U.S. dollars) 2/
Sources: Dominican authorities; Eastern Caribbean Central Bank (ECCB); and Fund staff estimates and projections.
1/ Including assumed future disbursements under the PRGF, and assuming all repurchases on an obligation basis.
2/ Including IMF repurchases in total debt service.
3/ Net international reserves of the monetary authorities; net imputed reserves of the ECCB and transactions with the Fund.
- 38 -
Table 11. Dominica: Millennium Development Goals 1/ 2/
1990
1994
1997
2000
2003
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
Goal 2: Achieve universal primary education
Net primary enrollment ratio (percent of relevant age group)
Primary completion rate, total (percent of relevant age group)
Percentage of cohort reaching grade 5 (percent)
Youth literacy rate (percent ages 15−24)
...
...
75.4
...
...
...
...
...
82.9
93
...
...
79.3
98
85.4
...
81.3
91
...
...
Goal 3: Promote gender equality and empower women
Proportion of seats held by women in national parliament (percent)
Ratio of girls to boys in primary and secondary education (percent)
Ratio of young literate females to males (percent ages 15−24)
Share of women employed in the nonagricultural sector (percent)
10.0
...
...
...
...
...
...
...
9.0
103.2
...
...
9.0
102.5
...
...
19.0
100.3
...
...
Goal 4: Reduce child mortality
Immunization, measles (percent of children ages 12−23 months)
Infant mortality rate (per 1,000 live births)
Under 5 mortality rate (per 1,000)
88
19
23
99
17
20
99
...
...
99
14
16
99
12
14
Goal 5: Improve maternal health
Births attended by skilled health staff (percent of total)
Maternal mortality ratio (modeled estimate, per 100,000 live births)
...
...
...
...
...
...
99.9
...
...
...
Goal 6: Combat HIV/AIDS, malaria, and other diseases
Contraceptive prevalence rate (percent of women ages 15−49)
Incidence of tuberculosis (per 100,000 people)
Number of children orphaned by HIV/AIDS
Prevalence of HIV, total (percent of population aged 15−49)
Tuberculosis cases detected under DOTS (percent)
...
19.3
...
...
...
...
18.1
...
...
...
50
17.3
...
...
84.2
...
16.5
...
...
...
...
15.7
...
...
35.5
Goal 7: Ensure environmental sustainability
Access to an improved water source (percent of population)
Access to improved sanitation (percent of population)
Access to secure tenure (percent of population)
CO2 emissions (metric tons per capita)
Forest area (percent of total land area)
GDP per unit of energy use (2000 PPP $ per kg oil equivalent)
Nationally protected areas (percent of total land area)
...
...
...
0.8
66.7
...
...
...
...
...
1.0
...
...
...
...
...
...
1.1
...
...
...
...
...
...
1.4
61.3
...
...
97.0
83.0
...
...
...
...
...
272.8
6.0
163.8
...
...
...
...
...
237.2
7.0
228.0
5.1
...
...
...
...
202.2
7.0
263.4
26.4
..
46.3
36.4
40.6
213.5
7.0
309.8
77.8
71.3
...
...
...
153.5
13.0
423.9
160.3
89.7
...
...
...
Goal 1: Eradicate extreme poverty and hunger
Percentage share of income or consumption held by poorest 20 percent
Population below $1 a day (percent)
Population below minimum level of dietary energy consumption (percent)
Poverty gap ratio at $1 a day (incidence x depth of poverty)
Poverty headcount, national (percent of population)
Prevalence of underweight in children (under five years of age)
Goal 8: Develop a global partnership for development
Aid per capita (current US$)
Debt service (percent of exports)
Fixed line and mobile phone subscribers (per 1,000 people)
Internet users (per 1,000 people)
Personal computers (per 1,000 people)
Unemployment, youth female (percent of female labor force ages 15−24)
Unemployment, youth male (percent of male labor force ages 15−24)
Unemployment, youth total (percent of total labor force ages 15−24)
Source: World Development Indicators database, April 2005.
1/ The goals, targets, and relevant indicators to assess progress over the period from 1990 to 2015 when targets are expected to be met,
are explained in http://millenniumindicators.un.org/unsd/mi/mi_goals.asp and http://ddp-ext.worldbank.org/ext/MDG/home.do
2/ Figures in italics refer to periods other than those specified.
- 39 -
APPENDIX I
Dominica: Fund Relations
(As of August 31, 2005)
Joined 12/12/78; Article VIII
I.
Membership Status
II.
General Resources Account
SDR Million
Quota
Fund holdings of currency
Reserve position in Fund
III.
8.20
11.16
0.01
SDR Million
SDR Department
Net cumulative allocation
Holdings
IV.
0.59
0.04
Outstanding Purchases and Loans:
SDR Million
PRGF Arrangements
Stand-By Arrangements
V.
4.21
2.97
Latest Financial Arrangements:
Type
Approval
Expiration
Date
Date
PRGF
Stand-by
SAF
Stand-by
EFF
12/29/03
08/28/02
11/26/86
07/18/84
02/06/81
12/28/06
01/02/04
11/25/89
07/17/85
02/05/84
12
Percent of
Allocation
100.00
7.36
Percent of
Quota
51.28
36.25
Amount
Amount
Approved
Drawn
(SDR Million)
7.69
4.21
2.97
2.97
2.80
2.80
1.40
0.97
8.55
8.55
Projected Payments to the Fund on an Obligation Basis (SDR Million)12:
Forthcoming
2005
2006
2007
Principal
0.26
1.10
1.23
Charges/Interest
0.04
0.13
0.08
Total
0.30
1.23
1.31
VI.
Percent of
Quota
100.00
136.15
0.11
2008
0.38
0.05
0.43
2009
0.50
0.04
0.54
Exchange rate arrangement: Dominica is a member of the Eastern Caribbean Currency
Union, which has a common central bank (the Eastern Caribbean Central Bank) and
Based on existing use of resources and present holdings of SDRs.
- 40 -
APPENDIX I
currency (the Eastern Caribbean dollar). Since July 1976, the Eastern Caribbean dollar
has been pegged to the U.S. dollar at the rate of EC$2.70 per U.S. dollar.
VII.
Safeguards Assessment: Under the Fund's safeguards assessment policy, the Eastern
Caribbean Central Bank (ECCB), of which Dominica is a participating government, is
subject to a full safeguards assessment. The on-site safeguards assessment was completed
on February 20, 2003, and concluded that the ECCB has in place appropriate mechanisms
to manage resources, including Fund disbursements and that the vulnerabilities that
remain do not present an undue risk. The safeguards assessment proposed specific
measures to address these vulnerabilities, which have been substantially implemented by
the ECCB.
VIII.
Article IV consultation: The last Article IV consultation was concluded by the
Executive Board on August 28, 2002; the relevant documents are IMF Country Report
No. 02/223 and IMF Country Report No. 02/224. Dominica is on a 24-month cycle.
IX.
Technical assistance: An MFD mission recently visited Roseau to provide technical
assistance in strengthening the supervisory framework for AML/CFT in the nonbank
sector. FAD missions have provided technical assistance on tax policy and
administration, most recently on VAT implementation, on urban property taxation
(1997), and on tax policy and administration, and expenditure control (1995). Technical
assistance from MFD and FAD has complemented the assistance that has been provided
by the Caribbean Regional Technical Assistance Center (CARTAC) in Barbados.
X.
FSAP: A joint IMF/World Bank team performed an assessment of the financial sector of
the member states of the ECCB, in two missions—September 1–19 and October 20–
31, 2003. The principal objective of the missions was to assist the authorities in assessing
the development needs and opportunities for the financial sector and identifying potential
vulnerabilities of financial institutions and markets to macroeconomic shocks, as well as
the risks to macroeconomic stability from weaknesses and shortcomings in the financial
sector. The Financial System Stability Assessment (FSSA) was discussed by the
Executive Board on May 5, 2004, and subsequently published on the IMF’s external
website, including the Report on the Observance of Standards and Codes (ROSC) on
Banking Supervision.
- 41 -
APPENDIX II
Dominica: World Bank Relations13
(As of August 31, 2005)
The World Bank role in Dominica: The Bank will continue to collaborate with the Fund
and other donors in supporting the authorities efforts in stabilizing macroeconomic
conditions and in restarting economic growth and reducing poverty. The Bank will lead the
policy dialogue on key structural reforms, including public investment, social protection, and
on the environment for private sector development.
Bank-Fund collaboration in specific areas: The World Bank and the IMF will continue to
collaborate on the financial sector, on the medium-term structural reform agenda and in
providing technical assistance to Dominica on macroeconomic management issues jointly
with the Caribbean Regional Technical Assistance Center (CARTAC).
Bank Group strategy: The World Bank’s strategy for Dominica is a part of the Country
Assistance Strategy (CAS) for the Eastern Caribbean (OECS) sub-region, presented to the
Bank Board on June 4, 2001. The CAS which covers FY 2002–06, proposes new
commitments of around US$110 million for the five borrowing member states of the OECS
(Dominica, Grenada, St. Kitts and Nevis, St. Lucia, and St. Vincent and the Grenadines). The
main goals of the strategy are to reduce income insecurity and vulnerability at the national
and household levels, and build human and institutional capacity to meet the challenging
economic and social environment facing these small states.
Ongoing projects: There are currently two ongoing World Bank projects in Dominica (as
well as other OECS borrowing countries) with total commitments of approximately
US$7.5 million.
(i) The OECS Telecommunications Reform Program, approved in FY 1998 seeks to
introduce pro-competition reforms in the telecommunications sectors and increase the supply
of informatics-related skills in the OECS borrowing countries. The project has helped these
countries establish a regional regulatory authority, negotiate with the sub-regional
telecommunications monopoly, and lower telephone rates. Dominica’s share of the
US$6.0 million loan is US$1.2 million.
(ii) The OECS Emergency Recovery Project: This project was approved in FY 2002 to help
mitigate the impact of the September 11 events on the tourism sector. The project supports
improvements to airport and sea port security arrangements. The World Bank’s assistance for
this sub-regional program is US$21 million, including US$3.2 million for Dominica.
13
Source: World Bank.
- 42 -
APPENDIX II
Negative pledge update: Dominica remains ineligible for new Bank lending operations in
light of the apparent violation of its negative pledge clauses under the earlier IBRD loans.
The government continues to make efforts to resolve this issue.
Analytical and advisory services: The Bank has recently prepared a number of analytical
reports for Dominica including a Country Financial Accountability Assessment, Social
Protection Review, a Country Procurement Assessment, and a Public Expenditure Review.
The Bank is also providing technical assistance to support public sector reforms and actions
in the petroleum, electricity and financial sectors.
Key aspects of the Bank’s Caribbean research and technical assistance program include:
(i)
(ii)
(iii)
(iv)
a recently completed study of Growth and Competitiveness in the OECS;
a recently completed FSAP in collaboration with the IMF;
an ongoing study of energy options in the OECS; and
a review of the relationship between poverty and the environment.
Financial Relations: Gross Disbursements and Debt Service During Fiscal Year
(In millions of U.S. dollars)
Total disbursements
Repayments
Net disbursements
Cancelled
Interest and fees
* Data for 2004 are projections.
1998
1999
2000
2001
2002
2003
2004
2005*
1.9
0.1
1.8
0.0
0.1
1.4
0.1
1.3
0.0
0.1
2.1
0.1
1.9
0.0
0.2
0.5
0.1
0.4
0.0
0.3
1.7
0.1
1.6
1.0
0.3
2.7
0.3
2.3
2.3
0.3
4.0
0.6
3.4
0.0
0.4
…
…
…
…
…
- 43 -
APPENDIX III
Dominica: Relations with the Caribbean Development Bank (CDB)
(As of August 31, 2005)
CDB has approved loans totaling US$143.7 million, of which US$10.1 million are undisbursed. In
July 2004, CDB approved exceptional financial assistance of a US$6.4 million grant in support of
Dominica's stabilization and reform program, as well as a combination of interest rate reduction and
extension of maturities on existing concessionary loans. The total operation resulted in a reduction in
Dominica's debt service estimated at US$13.2 million in NPV terms as at June 30, 2004.
Major projects
1.
Seventh Consolidated Line of Credit—to assist DAIDB in continuing to finance its lending
programme in the following areas: Agricultural and Industrial Credit, Housing and Student Loans.
US$7.0 million is approved and US$1.5 million is undisbursed.
2.
Upgrading of Ecotourism Sites—the construction of access roads and reception centres, related
infrastructure as well as site trails at five major tourism sites across the island. US$3.1 million is
approved and US$0.6 million is undisbursed
3.
Student Loan Scheme (Seventh Loan)—to provide DAIDB with resources to continue financing its
student loan programme. US$7.0 million is approved and US$3.0 million is undisbursed.
4.
Shelter Development Project—to establish a framework for developing the shelter sector on a
sustainable basis with particular reference to low-income households. US$2.3 million is approved and
US$1.6 million is undisbursed.
5.
Roseau Water and Sewerage Project—to provide for the rehabilitation and extension of the existing
Roseau sewerage system, the provision of pre-treatment facilities, a marine outfall, the replacement of
the central Roseau potable water distribution system and a partial upgrade of the water supply system.
US$10.0 million was approved and disbursed.
6.
OECS Solid Waste Management Project—the upgrading of dump sites into sanitary landfills;
procurement of equipment for the collection and transportation of waste; management of special
wastes; improvement of storage facilities for domestically generated waste and promotion of waste
recovery and recycling activities. US$1.4 million is approved and US$1.1 million is undisbursed.
7.
Caribbean Court of Justice—to provide for the establishment and operation of a final Court of Appeal
to replace the Judicial Committee of the Privy Council and to act as a final arbiter in disputes arising
between CARICOM member states or between a CARICOM national and another country.
US$2.2 million was approved and disbursed.
Dominica: Loan Disbursement
(In millions of U.S. dollars)
Net disbursement
Disbursement
Amortization
Interest and charges
Net resource flow
1
As at June 30, 2005.
2001
10.50
13.20
2.70
1.76
8.74
2002
3.66
6.25
2.59
1.90
1.76
2003
8.46
11.26
2.80
2.03
6.43
2004
10.39
20.61
10.22
2.25
8.14
20051
1.29
2.32
1.03
1.20
0.09
- 44 -
APPENDIX IV
Dominica: Statistical Issues
Dominica’s statistical database is inadequate for both meeting the authorities’ needs and
Fund surveillance. There are weaknesses in coverage, accuracy and reliability, frequency,
and timeliness that continue to frustrate effective economic analysis and policy formulation.
The weakest areas are the fiscal accounts, public debt, and the balance of payments.
The authorities are aware of the deficiencies in their statistical database and started
participation in the General Data Dissemination System (GDDS) in September 2000.
Metadata and plans for improving the statistical system are posted on the IMF’s
Dissemination Standards Bulletin Board (http://dsbb.imf.org).
Real sector
CPI data are provided on a timely basis. The Eastern Caribbean Central Bank (ECCB)
compiles semi-annual GDP estimates, which are available with a one-quarter lag. Estimated
annual data on nominal GDP as well as at constant prices of 1990 (by activity) are available
within a few months of the end of the year. Data on employment are very limited and there
are no official data on producer prices or wages in the private sector. Results of the 2001
population census have not yet been published.
Government finance
Statistical capacity problems affect the timely production of quality government finance
statistics. In particular, the data are subject to frequent revisions stemming in part from
omissions and misclassifications. Data on central government operations are incomplete and
must be supplemented with additional information from external sources. For instance, some
operations are undertaken outside the consolidated fund. These include certain investment
spending, loan and grant receipts, and on-lending and transfers to public enterprises. As a
result, capital expenditure data, recorded by the Treasury, must be supplemented with
additional donor financing information, particularly because the Public Sector Investment
Program (PSIP) data are not timely. Delays in the reporting of the PSIP data reportedly stem
from reporting delays from the line ministries.
The authorities do not provide consolidated nonfinancial public sector data; data for the rest
of the public sector—Dominica Social Security and the public enterprises—must be obtained
directly from each entity during Fund Article IV consultation missions.
In addition, only limited financing data are available. Although much progress has been
made in improving the measurement of the government's debt, there are concerns that there is
still some under-recording of government commitments. However, there are several ongoing
initiatives to strengthen expenditure management, which should help minimize the extent of
this problem. In particular, there is an ongoing effort to automate the expenditure execution
process. The new automation technology will be fully installed in all line ministries in 2004,
- 45 -
APPENDIX IV
at which point all local purchase orders (LPOs) will be entered and tracked electronically.
Automatic commitments will be charged against a specific budget allocation once LPOs are
generated electronically. All ministries and suppliers of goods and services will be compelled
to use the new system following the completion of the automation program.
No government finance data are reported to STA for publication in the International
Financial Statistics (IFS) or the Government Finance Statistics (GFS) Yearbook.
The authorities have been receiving technical assistance from the United Kingdom’s
Department for International Development (DIFID) on the cash management system and
from CARTAC on monitoring implementation of the stabilization program and treasury
accounting.
Monetary statistics
Monetary statistics are compiled by the ECCB on a monthly basis and reported to the Fund
regularly, although the coverage merits improvements. For instance, the banking statistics do
not explicitly capture loans from ECCB’s fiscal reserve tranche to the government. The
monetary survey does not include the accounts of credit unions that accept demand deposits.
The ECCB is aware of the need to improve coverage of the monetary statistics and is taking
steps to collect data on credit unions. Data on the activities of offshore banks are not reported
to the Fund.
Balance of payments
Balance of payments data are compiled by the ECCB on an annual basis and are not reported
in the format recommended in the fifth edition of the IMF’s Balance of Payments Manual.
The timeliness of the data has improved recently but the data still suffer from exceptionally
high and volatile errors and omissions, at times reaching levels of 12 percent of GDP.
External debt
The ministry of finance maintains a database on public and publicly-guaranteed external
loans that provides detailed and reasonably current information on disbursements, debt
service, and debt stocks. The Treasury maintains the data on bonds placed abroad.
Unfortunately, the two government agencies do not consolidate their databases to provide a
comprehensive external debt picture. The external debt data are deficient with the result that
debt stock cannot be accurately measured. Monthly information on payments by creditor
(actual and scheduled) is not fully and readily available, which impedes the compilation of
up-to-date information on arrears.
Jul. 2005
2004
June 2005
2004
Jul. 2005
8/24/05
03/15/05
08/24/05
03/15/05
8/24/05
8/24/05
06/10/05
8/25/05
8/15/05
8/15/05
8/19/05
8/22/05
8/22/05
8/25/05
NA
Date received
7
M
A
M
A
M
M
A
M
Q
M
M
M
M
M
NA
Frequency of
7
Data
M
A
Q
A
M
M
A
M
Q
M
M
M
M
M
NA
Frequency of
7
Reporting
A
A
A
A
A
A
A
M
Q
Q
Q
Q
Q
Q
NA
Frequency of
7
publication
2
Dominica is a member of the Eastern Caribbean Currency Union, in which the common currency of all member states (E.C. dollar) is pegged to the U.S. dollar at US$1=EC$2.70.
Includes reserve assets pledged or otherwise encumbered as well as net derivative positions.
3
Both market-based and officially-determined, including discount rates, money market rates, rates on treasury bills, notes and bonds.
4
Foreign, domestic bank, and domestic nonbank financing.
5
The general government consists of the central government and state and local governments.
6
Currency and maturity composition are provided annually.
1
Gross External Debt
GDP/GNP
Exports and Imports of Goods and Services
External Current Account Balance
Stocks of Central Government and Central Government-Guaranteed Debt
6
Jul. 2005
Revenue, Expenditure, Balance and Composition of Financing – Central
Government
4
2004
July 2005
Revenue, Expenditure, Balance and Composition of Financing – General
5
Government
Consumer Price Index
4
Jul. 2005
Consolidated Balance Sheet of the Banking System
June 2005
June 2005
Central Bank Balance Sheet
3
Jul. 2005
Broad Money
Interest Rates
Jul. 2005
Reserve/Base Money
Fixed Rate
June 2005
1
International Reserve Assets and Reserve Liabilities of the Monetary
1, 2
Authorities
Exchange Rates
Date of latest
observation
(As of September 14, 2005)
Dominica: Table of Common Indicators Required for Surveillance
- 46 APPENDIX IV
- 47 -
ATTACHMENT I
Roseau, Dominica
September 8, 2005
Mr. Rodrigo de Rato,
Managing Director,
International Monetary Fund
700 19th Street, NW,
Washington, DC 20431
USA
Dear Mr. de Rato,
1.
It has been more than a year and a half since Dominica requested an arrangement
under the Fund’s Poverty Reduction and Growth Facility (PRGF) to cope with the economic
crisis that had emerged and resolve our fiscal and debt difficulties. The government outlined
its economic policies in the letter of intent and memorandum of economic policies (MEP) of
December 10, 2003 and redefined them subsequently in the context of the programme
reviews.
2.
Performance under the programme remains satisfactory. All quantitative performance
criteria for end-June 2005 were met, except for the performance criterion on nonobservance
of external payments arrears. An external debt service payment on a government-guaranteed
loan was inadvertently delayed for a few days due to an operational error by the borrowing
institution. Government has made progress in structural reforms and all the structural
benchmarks for the fifth review were implemented. We have also made considerable
progress in the collaborative restructuring our debt, and will continue our good faith efforts
to reach agreements with our nonparticipating creditors.
3.
Dominica remains committed to the arrangement under the PRGF and the attached
supplementary MEP outlines our policies for FY 2005/2006. The proposed indicative targets,
performance criteria, and structural benchmarks are indicated in Tables 1 and 2. On this
basis, we request a waiver for the nonobservance of the continuous performance criteria on
external payments arrears, completion of the fifth review of the programme and the release of
the associated disbursement under the arrangement.
4.
We also request the extension of repurchase expectations arising in the one-year
period commencing on December 22, 2005 totaling an amount equivalent to SDR 1,268,444.
We believe that meeting these repurchase expectations would impose undue hardship and
- 48 -
ATTACHMENT I
risk at a crucial time, and we therefore request instead that these repurchases be made on an
obligations basis starting on December 22, 2006.
5.
The Government of Dominica will provide the Fund with such information as the
Fund may request in connection with progress in implementing the economic and financial
policies, and achieving the objectives of the programme. The government believes that the
policies set out in the attached MEP are adequate to achieve the objectives of the programme,
but it will take further measures that may become necessary for this purpose. We will consult
with the Fund on the adoption of these measures, and in advance of revisions to the policies
contained in the MEP, in accordance with the Fund's policies on such consultation. We
authorize the Fund to publish this letter and the attached supplement to our MEP to facilitate
a wider access to our policies and signal the seriousness of our commitment to the
programme to civil society and the international community.
Sincerely,
/s/
Honourable Roosevelt Skerrit
Prime Minister and Minister of Finance and Planning
Attachment
- 49 -
ATTACHMENT I
SUPPLEMENT MEMORANDUM OF ECONOMIC POLICIES
OF THE GOVERNMENT OF DOMINICA
I. BACKGROUND
1.
Our economy continues to recover from the economic crisis and financial disarray in
2001–02 triggered by the build-up of public debt to unsustainable levels. Reflecting the
comprehensive economic reforms that the Government of the Commonwealth of Dominica
has pursued in the last few years, public finances are on a firmer footing and economic
growth has recovered—with output expansion set to exceed the historical average for the
second straight year in 2005.
2.
Sustaining the improved growth performance to better the standard of living of
all Dominicans remains the central objective of our economic policies. To this end, our
economic reform strategy retains its four elements, with the emphasis now decidedly shifting
to the policies necessary to sustain high economic growth. Specifically:
•
With creditor participation in our collaborative debt restructuring past 70 percent,
our objective is to try to reach agreement with all remaining nonparticipating
creditors;
•
Our fiscal stance will be consistent with reducing the public debt burden to
sustainable levels;
•
Fiscal reforms are being undertaken to improve the transparency and effectiveness
of the tax regime and the budgetary process; and
•
Critically, we are also determined to improve the enabling environment for private
sector investment, which will require measures to enhance the efficiency of the
public service and re-orient our public sector investment programme towards the
provision of physical and human capital investment.
II. PERFORMANCE UNDER THE PROGRAMME
3.
Macroeconomic outcomes were strong in 2004 and the first half of 2005. Output
growth in 2004, estimated at some 3½ percent, was broad-based, with transportation,
agriculture, manufacturing and construction all showing signs of a robust recovery from the
2001–02 slump. This rebound in activity was mirrored in a sharp rebound in credit growth,
which had been contracting since early 2001, but accelerated sharply last year to an annual
growth of 7 percent. While inflation has been somewhat volatile in recent months, it
nonetheless averaged 1½ percent in 2004. Export growth has remained modest at some
9 percent in 2004, while imports have surged reflecting the economic recovery and higher
energy prices. The same broad trends are evident in developments in the first half of this
year.
- 50 -
ATTACHMENT I
4.
All but one performance criteria for the fifth review have been met. Reflecting
one-off revenues which contributed to arrears reduction and lower spending on goods and
services, end-March 2005 indicative targets were met with large margins as were all endJune quantitative performance criteria. The primary balance in FY 2004/05 was 4.4 percent
of GDP, about 2½ percent above the target notwithstanding the fact that unexpected one-off
expenditures related to the Caribbean Court of Justice and emergency reconstruction costs
following last November’s earthquake had to be accommodated into the budget. The margin
on the wage bill performance criterion was smaller at less than EC$1 million. However, due
to a technical glitch, there was a temporary delay (about a week) in debt service payment by
DOMLEC on a government guaranteed loan causing the continuous performance criteria on
nonaccumulation of external arrears to be unobserved.
5.
All three structural benchmarks for the fifth review under the programme have
been now been observed:
•
The on-site inspection of the Roseau Cooperative Credit Union was completed on
schedule. Concerns about the level of nonperforming assets, account-handling
practices, and the quality of the audit process were flagged.
•
Amendments to the Finance Administration Act for Cabinet and public discussion
were prepared in May. Proposals for numerical targets were prepared separately in
August, and submitted to Cabinet with the amendments. Public consultation began in
September.
•
The 2005/06 budget was approved by Parliament on August 4, with a primary
balance target consistent with the programme.
6.
We are also making considerable progress in identifying and implementing
other structural reforms.
•
The Government of Dominica has decided to publish in the Official Gazette all
Cabinet decisions granting new tax and duty concessions—a step that will enhance
the transparency of public finances. Concessions granted in 2004/05 were sent to the
publishers in August. Going forward, publication will occur on a monthly basis (with
a one month lag). The published material will identify the beneficiary of the tax
exemption as well as the legal basis for the concession.
•
In the area of public expenditure management, the main government account is now
being reconciled on a monthly basis. In addition, all transactions conducted are now
being captured in the general ledger, and opening balances will be adjusted by endDecember. Moreover, all local purchase orders are now generated electronically.
•
In an effort to strengthen the accountability and financial management of public
enterprises and statutory bodies and ensure greater reporting to the general public, we
will submit to Parliament the audited financial accounts for the year ending in 2004
- 51 -
ATTACHMENT I
for AID Bank, DOWASCO, and DEXIA by end-2005. The accounts for the NDC are
being prepared for audit by end-December and will be submitted to Parliament early
in 2006. We will continue this practice going forward.
•
With the help of an IMF/World Bank technical assistance mission, a review of the
financial condition of Dominica Social Security (DSS) was completed in June. The
study shows that the pension system’s finances are on a highly unsustainable
trajectory. However, the study also identified reforms that, if implemented promptly,
can address the very large threat to public finances.
7.
We remain committed to engaging our creditors in good faith negotiations. We
have signed agreements with all our domestic creditors, including DSS (see below). As a
sign of our commitment to making good faith efforts to reach agreement with remaining
external nonparticipating creditors, we continue to make payments on the new restructured
terms into an escrow account on their behalf. We also expect to shortly pass legislation to
allow the debentures that we have issued to the creditors that participated in the restructuring
to be traded on the Eastern Caribbean Stock Exchange (ECSE).
III. ENABLING GROWTH AND REDUCING VULNERABILITIES
8.
The government is in the process of finalizing its growth and social protection
strategy (GSPS) paper to guide our policies over the medium term. The growth strategy
seeks to make the private sector the engine of economic growth, with the government playing
a facilitating role. The social protection aspects will focus on reducing the vulnerabilities
during the period of adjustment.
9.
The key growth sectors will be tourism, energy, services, agriculture, light
manufacturing, and offshore education. The potential for heritage, health, and ecotourism
is largely untapped; we will focus on improvement of related infrastructure and product
development, which will facilitate private sector investments. We are working with potential
investors to tap our geothermal resources, to satisfy both export and domestic demand. We
expect a substantial lowering of the cost of electricity over the medium term as this project
develops, which would help spur light manufacturing, including agro-processing. On
agriculture, the development of the tourism sector and the agro-processing sub sector should
lead to increased demand for agricultural produce. We also hope to target niche markets,
including in the region, for agricultural exports. There is also potential for further
development of offshore educational institutions and linking them further with the domestic
economy. The recent liberalization of the telecommunications sector has created potential for
the development of related services. On this basis, we expect the economy to grow at around
3 percent per annum over the medium term. This should allow us to make inroads towards
lowering unemployment and consequently reduce the incidence of poverty. In the short term,
however, we intend to strengthen the social safety nets by ensuring better targeting.
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ATTACHMENT I
10.
Consistent with the broad strategy laid out in the GSPS, the government’s
programme to improve the enabling environment for increased private sector activity
includes several important initiatives for the immediate period ahead.
•
We intend to obtain parliamentary approval (by end-December, 2005) of amendments
to the Electricity Supply Act and related legislation with a view to demonopolizing
the sector to inter alia allow new entrants, establish a regulatory commission, and put
in place a tariff structure more reflective of production costs and other economic
circumstances. Beyond strengthening the regulatory framework for electricity supply,
these changes are important to attract investors to exploit our substantial geo-thermal
energy capacity—the exploitation and export of such electricity would, in addition to
helping boost growth, provide foreign exchange earnings, and reduce vulnerabilities
to high oil prices.
•
To improve the effectiveness of the financial sector and ensure its viability is
sustained, we will take the necessary steps by end-October 2005 to allow the FSU
(with external technical assistance), to conduct an on-site inspection of AID Bank (by
end-March 2006). Relatedly, a memorandum of understanding has been signed with
the Roseau Cooperative Credit Union (RCCU) to address the issues identified during
the recent on-site inspection. The FSU will ensure that these measures are adopted by
end-December to bring the RCCU in full regulatory compliance.
•
There is a need to redefine the role of the public sector outside of the central
government, to realign it towards the requirements of private sector-led growth and
ensure high quality of public services. To this end, plans are under way to complete
strategic reviews and establish action plans (by end-December 2005) for the
operations of the AID Bank, DEXIA and NDC, with a view to enhancing their
efficiency, streamlining their functions and improving accountability. The reviews
will consider the justification for the continued existence of all of these three agencies
in an environment where the government’s role in the growth process is to provide a
supportive environment for the private sector. An important objective of these
reforms is a one-stop shop that will streamline the process and shorten the time
required for establishing businesses—to be put in place by end-March 2006.
•
We recognize the need to reduce red tape in order to encourage investments,
including from the Dominican Diaspora. We continue to consider additional ways in
which the Diaspora can contribute to the development of Dominica. We are in the
process of streamlining paperwork and other requirements related to the importation
of goods into Dominica. We will also make such requirements transparent by
publishing them in government websites.
IV. THE 2005/06 BUDGET
11.
The macroeconomic framework underpinning our budget assumes growth will
be sustained at 3 percent this year and next. These rates of growth are higher than the
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historical average, but not unduly optimistic taking into account the spare capacity in the
economy and the expected boost to activity from higher public sector investment. Inflation is
expected to remain subdued at 1½ percent in 2005/06.
12.
Further debt consolidation is an important pillar of our macroeconomic policies.
The 2005/06 budget targets a primary surplus of 3 percent of GDP, broadly in line with that
realized in 2004/05 and consistent with reducing our high debt burden to sustainable levels
over the medium term. A still higher primary balance would be prudent given our country’s
vulnerability to natural disasters—as last November’s earthquake attests—and the need to
prepare for the steep increase in pension costs projected for the coming years. But this needs
to be weighed against the near-term investments needs. The 3 percent primary surplus for
2005/06 and beyond strikes the appropriate balance.
13.
The budget is underpinned by a number of revenue and expenditures measures,
including:
•
As announced in the budget speech, the VAT is expected to come into effect on
March 1, 2006. The switch from the consumption and sales taxes to VAT is expected
to be revenue neutral, but with substantial benefits in terms of expanding the tax base
and economic efficiency.
•
As originally legislated, the 5 percent cut in civil servants wages imposed at the
outset of the stabilization programme has been restored in the 2005/06 budget. This
would imply a wage bill of some 13.7 percent of GDP, which is very high even by the
standards of other small island economies. Accordingly, measures are being taken to
avoid the wage bill crowding-out other essential and productive expenditures and
adjusting the wage scale over time to allow the government to retain and attract more
highly qualified personnel (see below).
•
To make the state college financially independent over time, starting in FY 2005/06,
the college is being treated as an independent entity from the budget, with financial
support limited to an explicit transfer. The plan is to make the college rely
increasingly on nonbudgetary sources of funding.
•
The public sector investment programme (PSIP) will be kept to a level consistent
with our implementation capacity, and focused on projects that will yield the highest
rates of return.
•
We will use budget-support grants in excess of programmed amounts to pay down
our debt and build up bank balances. The next review will reassess the outlook for
revenues and expenditures and revisit the fiscal programme targets as appropriate.
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ATTACHMENT I
V. STRUCTURAL FISCAL REFORMS
14.
Large unfunded liabilities in the pension system are a major threat to public
finances. Reflecting population aging, the number of pensioners per contributor is expected
to increase sharply from 0.23 in 2004 to 0.32 in 2020 and 0.78 by 2050. The net present
value (NPV) of the unfunded liabilities of DSS are estimated at more than 150 percent of
GDP. The restructuring of the government’s debt has also had the effect of further weakening
the financial position of DSS. Therefore, in the absence of corrective measures, cash flows
will turn negative in 2014 and DSS will deplete its reserves by 2025. The transfers that the
central government would need to make to fill the gap between DSS’s income and spending
would mean that public finances would return to an unsustainable path.
15.
The government recognizes that reforms to address the financial problems in
DSS are unavoidable. Ultimately, the choice is not between reform and no reform, but
between gradual, moderate, and equitable reform now or abrupt, drastic, and inequitable
reforms later when the pension system’s finances are exhausted. Accordingly, we will
prepare an action plan (by end-December 2005) to eliminate the unfunded liabilities of DSS
that will identify specific steps and a time line for implementation, and we will subsequently
have this plan approved by Cabinet (by end-March 2006). Putting the finances of the DSS on
a sustainable footing will require adjustments to: the replacement rate, the contribution rate,
the number of years over which average earnings are calculated, and the retirement age. The
reform strategy will consider the appropriate balance between these options. Another
important reform objective is international diversification of DSS’s portfolio, which we will
be undertaken in a gradual manner. In the interim, we have regularized the financial relations
between the government and DSS, including by finalizing the debt restructuring agreement
in September 2005.
16.
The overriding objective for the public sector is for our country to have a
relatively smaller, more efficient, and better paid public service—consistent with our
vision of the private sector playing the dominant role in the economy. To that end, we
intend to reduce the role of the government, with particular attention to the share of the wage
bill in GDP.
•
For 2005/06, the government has adopted a number of measures to initiate the
process of focusing the civil service on the core activities that the government needs
to provide. These measures include outsourcing of janitorial and government building
protection services and streamlining the airport and ports authorities. Government is
hopeful that the initial (redundancy) costs of this exercise will be grant-financed from
the EU’s Framework of Mutual Obligations. Steps are also being taken to reduce
overtime pay at Customs. These initiatives will ensure that the allocation for the wage
bill will be adhered to.
•
Second, as outlined in the budget, in addition to the foregoing measures, the
government will keep under review the scope for streamlining, commercializing or
privatizing other services. The government has already identified possible additional
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ATTACHMENT I
measures. The overall objective of these initiatives is to reduce the wage bill further
by 1–1½ percent of GDP from its current level of 13¾ percent of GDP over the next
three years. With this in mind, the on-going review by the Establishment, Personnel
and Training Division on public service reform will continue, with a view to
streamlining the structure and functioning of government ministries and departments.
This review, which will be completed by end-February, will inter alia seek to address
unfilled positions, with a view to identifying and eliminating those that are no longer
necessary.
•
Third, future wage and salary increases will be consistent with progress in reaching
the objectives of reducing the wage bill. The government recognizes the need to
improve emoluments of deserving civil servants, and expects that further
rationalization of public sector employment will contribute to this.
17.
Further reforms are also being put in place to strengthen the framework
governing public finances. Based on the outcome of the public and Cabinet discussions of
the proposed revisions to the Finance Administration Act (FAA), we plan to obtain Cabinet
approval of the amendments to the FAA by end-November 2005 and parliamentary approval
in early 2006. These amendments to the FAA will improve the credibility of fiscal policy,
provide an anchor for public expectations regarding the public finances over the medium
term, as well as improve the transparency and accountability of the management of public
finances. Specifically:
•
The revised legislation will outline as an important objective the reduction of public
debt to prudent levels. It will further note that the government will target a primary
surplus consistent with reducing public debt annually while the debt stock remains
above 60 percent of GDP—the benchmark recommended by the ECCB. Where such
a primary surplus is not being targeted, the government, in its annual budget
document, will need to provide a comprehensive explanation of the reasons for the
deviation from the target and outline its policies for getting back on target within the
shortest possible timeframe.
•
Moreover, these amendments will be buttressed by a public commitment by the
government to aim for a 3 percent of GDP primary surplus in the budget. Again,
where a primary surplus of at least 3 percent is not being targeted, the government,
will provide a comprehensive explanation of the reasons for the deviation from the
target and outline its policies for getting back on target within the shortest possible
timeframe.
18.
Further reforms are planned to improve the consistency of budget and debt
management. With the help of CARTAC, we intend to introduce medium-term budgeting
practices for line ministries to minimize ad hoc shifts in the fiscal stance and instill a greater
measure of expenditure controls. To ensure debt remains sustainable and off-budget entities
do not accrue excessive liabilities, we have adopted guidelines under which the government
is willing to extend guarantees.
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ATTACHMENT I
19.
Preparations for the introduction of a VAT on March 1, 2006 continue apace.
The draft VAT and Excise Tax Laws are expected to be approved by Parliament in August
(prior action), with implementing regulations finalized soon after. The VAT will have two
rates (a standard 15 percent rate and a 10 percent rate for hotel accommodation), and zero
rating and exemptions have been kept to a minimum. To ensure the VAT will be introduced
on time, organizational and staffing issues have been resolved and IT infrastructure will be
tested and put in place by end-October 2005. All necessary steps will be taken to ensure that
the introduction of VAT refunds can be made on a timely basis.
20.
The government also intends to undertake a comprehensive review of statutory
tax exemptions. The review will by end-December consider the justification for statutory
and nonstatutory concessions, and repeal those that are found to be unnecessary.
21.
The government will continue to closely monitor the projects that are included
in the Public Sector Investment Programme (PSIP) for their consistency with our
growth and poverty reduction strategy. The PSIP for the 2005/06 budget is broadly in line
with the our poverty reduction strategy document—the Growth and Social Protection
Strategy (GSPS) paper. To ensure full consistency with the GSPS, government will seek to
ensure an appropriate balance between investments in the economic sectors and economic
and social infrastructure. The government will strictly limit nongrant financed capital
spending to a level that is consistent with agreed macroeconomic parameters. Consistent with
our implementation capacity, we will also limit the overall PSIP to around 10 percent of
GDP.
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ATTACHMENT I
Table 1. Dominica: Quantitative Performance Criteria and Indicative Targets
Under the PRGF, September 2005–June 2006 1/
2005
Sept. 30
Dec. 31
Program 2/ Program 2/
2006
Mar. 31
June 30
Program 2/ Program 2/
I. Performance Criteria (PC)
(In millions of Eastern Caribbean dollars)
Central government primary balance
2.9
7.6
16.2
23.7
27.6
55.7
81.4
106.5
Banking system net credit to central government
3.0
-0.1
-6.4
-13.6
Net changes in central government arrears to private
domestic parties
4.0
8.0
8.0
8.0
Disbursement of central government or central
government guaranteed external nonconcessional debt
with maturity of at least one year
1.9
4.4
6.9
9.0
Net changes in the outstanding stock of short-term external
debt contracted or guaranteed by the central
government (with maturity of less than one year) 3/
0.0
0.0
0.0
0.0
Nonaccumulation of central government and central
government guaranteed external payments arrears 3/ 4/
0.0
0.0
0.0
0.0
-10.5
-14.0
-18.7
-19.3
52.9
111.1
171.9
230.8
5.5
14.0
27.3
38.9
Central government wage bill
(In millions of U.S. dollars)
II. Indicative Targets (IT)
(In millions of Eastern Caribbean dollars)
Central government overall balance
Central government revenues
Central government primary savings
Sources: Dominican authorities; and Fund staff estimates and projections.
1/ All variables and any adjustors that apply, are defined in the Technical Memorandum of Understanding.
2/ Cumulative amounts from June 30, 2005. Targets for September 31, 2005 and March 31, 2006 are all indicative targets.
3/ These performance criteria will be monitored on a continuous basis.
4/ Waiver requested for the external arrears known at the time of the Executive Board discussion on October 14, 2005.
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ATTACHMENT I
Table 2. Structural Conditionality
(Structural benchmarks, unless otherwise indicated)
Prior Actions for the Fifth Review
•
Passage by Parliament and enactment into law of a VAT Act with an effective date of
March 1, 2006.
•
Approval by Cabinet of an implementation plan to rationalize the wage bill.
Sixth Review
•
Establish legislative basis for the Financial Services Unit (FSU) to supervise
insurance companies and regulate all nonbank financial institutions, including the
Agriculture and Industrial Development Bank (end-December, 2005).
•
Complete strategic review and establish action plans for the operations of Aid Bank,
DEXIA and NDC, with a view to enhancing their efficiency, streamlining their
functions and improving accountability (end-December, 2005).
•
Parliamentary approval of amendments to the Electricity Supply Act and related
legislation (end-December 2005).
•
Complete review by end-February 2006 the streamlining of the structure and
functioning of government ministries and departments, with a view to further
reducing wage bill over the following three years.
•
Implementation of VAT starting March, 1 2006 (structural performance criterion).
Seventh Review
•
Cabinet approval of action plan to eliminate the unfunded liabilities of DSS (endMarch 2006).
•
Parliamentary approval of amendments to the Finance Administration Act as
described in paragraph 17 (end-May, 2006).
•
Line ministries to submit rolling three-year expenditure plans (end-May, 2006).
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ATTACHMENT II
TECHNICAL MEMORANDUM OF UNDERSTANDING
1.
Dominica’s performance under the Poverty Reduction and Growth Facility (PRGF),
described in the letter of the Government of Dominica dated September 8, 2005, will be
assessed by the IMF on the basis of the observance of quantitative performance criteria as
well as compliance with structural performance criteria and benchmarks. This Technical
Memorandum of Understanding (TMU) sets out and defines the quantitative performance
criteria, indicative targets, and benchmarks specified in Tables 1 and 2 of the Supplement
Memorandum of Economic Policies (SMEP), as well as the monitoring and reporting
requirements.
2.
The Dominican authorities are committed to transmit to the Fund staff the best data
available. All revisions or expectations thereof shall be promptly reported to the Fund staff.
3.
The variables mentioned herein for the purpose of monitoring the performance
criteria, which are not explicitly defined, are consistent with the Government Financial
Statistics (GFS). For variables omitted from the TMU which are relevant for the program
targets, the authorities of Dominica shall consult with the Fund staff on their appropriate
treatment, based on GFS principles and Fund program practices.
I. FISCAL TARGETS
A. Indicative Target on the Overall Balance of the Central Government
4.
The central government overall balance will be measured from the financing side
as the sum of the net domestic borrowing plus net external borrowing.
5.
Net domestic financing by the central government is the sum of: (i) net domestic
bank financing as measured by the change in the domestic banking system credit to the
central government net of deposits, as reported by the consolidated balance sheet of the
monetary authorities14 and commercial banks, including special tranches from the ECCB and
excluding net changes in (a) “double signature accounts”15 and (b) the deposits of the cash
grants from the People’s Republic of China; (ii) net nonbank financing as measured by the
net changes in holdings of government securities by nonbanks, and net borrowing from
nonbank institutions; (iii) the change in the stock of domestic arrears of the central
14
Consolidating the ECCB’s balance sheet (excluding the government’s IMF operating account) and the
government’s transactions with the IMF.
15
The “double signature accounts” include the accounts 115002797, 115002976,115002220, 115001912,
115003051, 115001911, 115003025, 115001471, 115001523, 115003053, 115001710, and 100038724 held in
the National Bank of Dominica (NBD), and any new account in which grant receipts are deposited and which
requires a signature of an external party for the release of its funds. It is expected that the forthcoming grants
from the European Union in late 2005 will be released through a “double signature account.”
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ATTACHMENT II
government defined as net changes in unpaid checks issued, unprocessed claims, pending
invoices, plus accrued interest payments, and other forms of expenditures recorded above the
line but not paid; (iv) gross receipts from divestment; (v) financing from debt restructuring
measured as domestic debt service payments (principal and interest) on a due basis less
actual debt service payments; and (vi) any other exceptional financing.16
6.
Net external financing of the central government is defined as the sum of
(i) disbursements of project and nonproject loans, including securitization, but excluding the
use of IMF resources; (ii) proceeds from bonds issued abroad; (iii) exceptional financing
(rescheduled principal and interest), net changes in cash deposits held outside the domestic
banking system, (iv) net changes in short-term external debt; (v) any change in arrears on
external interest payments and other forms of external expenditures recorded above the line
but not paid; (vi) financing from debt restructuring measured as external debt service
payments (principal and interest) on a due basis less actual debt service payments; (vii) any
other exceptional financing; and less (viii) payments of principal on current maturities for
bonds and loans on a due basis but excluding the use of IMF resources, and including any
prepayment of external debt.
7.
The programmed amounts of debt service on a due basis are shown in Table 1 below:
Table 1. Domestic and External Debt Service
Payments on a Due Basis
External
Interest
Payments
External
Amortization
Payments
Domestic
Interest
Payments
Domestic
Amortization
Payments
5.1
10.1
15.2
20.2
0.9
1.7
2.9
3.5
(In millions of Eastern Caribbean dollars)
Cumulative flows (from June 30, 2005)
End-September 2005
End-December 2005
End-March 2006
End-June 2006
16
8.3
11.5
19.7
22.8
3.2
13.2
16.1
20.4
Treasury bills will be recorded at face value, except for those held by the banking system which will be
recorded on a purchase price basis.
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ATTACHMENT II
The program floors on the overall balance are reported in Table 2 below.
Table 2. Indicative Target on the Overall Balance
of the Central Government
(In millions of Eastern Caribbean dollars)
Cumulative balance (from June 30, 2005)
End-September 2005 (indicative target)
End-December 2005 (indicative target)
End-March 2006 (indicative target)
End-June 2006 (indicative target)
-10.5
-14.0
-18.7
-19.3
8.
The floor on the overall balance of the central government will be adjusted as
follows:
(i)
Upward17 to the extent that budgetary grants exceed programmed amounts. Budgetary
grants are defined as grant receipts that are not earmarked for capital outlays, and
including the drawdown of deposits of the cash grants from China. For the purpose of
this adjustor, the programmed budgetary grants for fiscal year 2005/06 amount to:
EC$2.6 million by end-September 2005; EC$3.8 million by end-December 2005;
EC$5.0 million by end-March 2006; and EC$6.2 million by end-June 2006.18
(ii) Downward by the amount severance payments and the administrative expenditures
linked to the debt restructuring operations exceed the grants targeted to these programs.
(iii) Upward by the amount received from Security Bond forfeitures.
B. Performance Criterion on the Central Government Primary Balance
9.
The central government primary balance is defined as the central government
overall balance (from the financing side as defined in paragraph 4) plus domestic and
external interest payments on a due basis. Interest payments do not include either domestic or
external interest payments made by the central government on behalf of other parties.
10.
The program floors on the central government primary balance are reported in
Table 3 below.
17
18
Upward adjustment means lower deficit.
The program assumes that EC$4.8 million will be received from EU STABEX 1998/99/00 to cover severance
payments and other already identified projects.
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ATTACHMENT II
Table 3. Performance Criterion on the Central Government
Primary Balance
(In millions of Eastern Caribbean dollars)
Cumulative balance (from June 30, 2005)
End-September 2005 (indicative target)
End-December 2005 (performance criterion)
End-March 2006 (indicative target)
End-June 2006 (performance criterion)
11.
2.9
7.6
16.2
23.7
The same adjustors described in paragraph 9 apply to the primary balance.
Performance Criterion on the Central Government Wage Bill
12.
The central government wage bill will be measured as the total expenditure of the
central government on wages and salaries of central government employees net of wage
refunds, including acting allowances, special duty allowances, responsibility allowances,
subsistence allowances, the employer contribution to Dominica Social Security, but not
including retirement benefits, severance payments or other related one-off payments
(i.e., accumulated leave). As such, the ceiling does not include wage-related transfers to
schools, the National Development Corporation, and local governments.
13.
The program ceilings on the central government wage bill are shown in Table 4
below:
Table 4. Performance Criterion on the Central Government Wage Bill
(In millions of Eastern Caribbean dollars)
Cumulative flows (from June 30, 2005)
End-September 2005 (indicative target)
End-December 2005 (performance criterion)
End-March 2006 (indicative target)
End-June 2006 (performance criterion)
27.6
55.7
81.4
106.5
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ATTACHMENT II
C. Performance Criterion on the Central Government Arrears Accumulation to
Domestic Private Parties
14.
Net changes in central government arrears to domestic private parties is defined
as changes in the sum of all pending payments by government for goods and services already
purchased from these parties, as well as pending unpaid checks for payments into the escrow
account set up for debt restructuring. Private domestic parties exclude DOWASCO,
Dominica Social Security, National Development Corporation, Dominica Broadcasting
Corporation, DEXIA, and the Ports Authority. The measure used will be unpaid checks
issued and pending invoices for which payment is overdue.
15.
The program ceilings on the central government arrears accumulation to domestic
private parties are reported in Table 5 below.
Table 5. Performance Criterion on the Central Government Arrears
Accumulation to Domestic Private Parties
(In millions of Eastern Caribbean dollars)
Cumulative flows (from June 30, 2005)
End-September 2005 (indicative target)
End-December 2005 (performance criterion)
End-March 2006 (indicative target)
End-June 2006 (performance criterion)
4.0
8.0
8.0
8.0
D. Indicative Targets on Revenues of the Central Government
16.
Central government revenues are defined as the tax collections and nontax
revenues reported in the treasury accounts (economic classification), excluding: (i) revenues
from the economic citizenship program, (ii) foreign and domestic grant receipts,
(iii) repayment of loans, (iv) wage refunds, and (v) privatization receipts, and includes
income tax refunds. Capital revenues are excluded.
17.
The program floors on the revenues of the central government are reported in Table 6
below.
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ATTACHMENT II
Table 6. Indicative Targets on Revenues of the Central Government
(In millions of Eastern Caribbean dollars)
Cumulative flows (from June 30, 2005)
End-September 2005 (indicative target)
End-December 2005 (indicative target)
End-March 2006 (indicative target)
End-June 2006 (indicative target)
52.9
111.1
171.9
230.8
E. Indicative Targets on the Primary Savings of the Central Government
18.
Central government primary savings is measured on an accrual basis (including
unpaid checks issued and unprocessed invoices) and is defined as the central government
revenue before grants (i.e., excluding grants) minus current noninterest expenditure. The
adjustors described in paragraph 9 apply to the central government primary savings.
19.
The program ceilings on the central government primary savings are reported in
Table 7 below.
Table 7. Indicative Targets on the Primary Savings of the
Central Government
(In millions of Eastern Caribbean dollars)
Cumulative flows ( from June 30, 2005)
End-September 2005 (indicative target)
End-December 2005 (indicative target)
End-March 2006 (indicative target)
End-June 2006 (indicative target)
5.5
14.0
27.3
38.9
Monitoring discretionary tax exemptions
20.
Discretionary tax exemptions are defined as tax exemptions granted under
Sections 6(2) and 31 of the Consumption Order Act, Section 26 of the Sales Tax Act,
Section 60 of the Customs (Control and Management) Act, Section 25(2) of the Income Tax
Act, or remissions of tax under Section 109 of the Income Tax Act (except in cases where the
Comptroller certifies that the tax to be remitted is uncollectible).
21.
The number of discretionary tax exemptions will be monitored on a continuous basis.
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ATTACHMENT II
II. MONETARY TARGETS
A. Performance Criterion on the Net Credit of the Banking System to the Central
Government
22.
Net credit of the banking system is defined as in paragraph 5. The program ceilings
on the net credit of the banking system to the central government are reported in Table 8
below.
Table 8. Performance Criterion on the Net Credit of the
Banking System to the Central Government
(In millions of Eastern Caribbean dollars)
Cumulative flows (from June 30, 2005)
End-September 2005 (indicative target)
End-December 2005 (performance criterion)
End-March 2006 (indicative target)
End-June 2006 (performance criterion)
3.0
-0.1
-6.4
-13.6
23.
The ceiling on net credit of the banking system will be adjusted upward (downward)
to the extent that actual interest payments are higher (lower) than the programmed amounts
on a cash basis. The programmed amounts of interest payments on a cash basis are shown in
Table 9 below.
Table 9. Interest Payments on a Cash Basis
Total
Interest
Payments
Domestic
Interest
Payments
External
Interest
Payments
(In millions of Eastern Caribbean dollars)
Cumulative flows (from June 30, 2005)
End-September 2005
End-December 2005
End-March 2006
End-June 2006
5.0
8.8
13.9
17.8
2.7
4.5
7.2
9.1
2.3
4.3
6.6
8.7
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ATTACHMENT II
III. EXTERNAL SECTOR TARGETS
A. Performance Criterion on Disbursements of Nonconcessional External Central
Government or Central Government Guaranteed Debt with Maturity of at Least One
Year
24.
Disbursements of nonconcessional external central government and central
government guaranteed debt with maturity of at least one year will be monitored by the
Accountant General’s office on a monthly basis. Central government and central government
guaranteed debt is defined to include debt contracted or guaranteed by the central
government.
25.
The program ceilings on disbursements of nonconcessional external central
government or central government guaranteed debt with maturity of at least one year are
reported in Table 10 below.
Table 10. Performance Criterion on Disbursements of Nonconcessional
External Central Government or Central Government Guaranteed
Debt with Maturity of at Least One Year
(In millions of U.S. dollars)
Cumulative flows (from June 30, 2005)
End-September 2005 (indicative target)
End-December 2005 (performance criterion)
End-March 2006 (indicative target)
End-June 2006 (performance criterion)
2.6
6.7
8.3
10.0
26.
The term “debt” is defined as set forth in point No. 9 of the Guidelines on
Performance Criteria with Respect to Foreign Debt (Decision No. 12274-(00/85),
August 24, 2000):
“(a) For the purpose of this guideline, the term “debt” will be understood to mean a current,
i.e., not contingent, liability, created under a contractual arrangement through the provision
of value in the form of assets (including currency) or services, and which requires the obligor
to make one or more payments in the form of assets (including currency) or services, at some
future point(s) in time; these payments will discharge the principal and/or interest liabilities
incurred under the contract. Debts can take a number of forms, the primary ones being as
follows:
(i) loans, i.e., advances of money to obligor by the lender made on the basis of an
undertaking that the obligor will repay the funds in the future (including deposits,
bonds, debentures, commercial loans, and buyers’ credits) and temporary exchanges
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ATTACHMENT II
of assets that are equivalent to fully collateralized loans under which the obligor is
required to repay the funds, and usually pay interest, by repurchasing the collateral
from the buyer in the future (such as repurchase agreements and official swap
arrangements);
(ii) suppliers’ credits, i.e., contracts where the supplier permits the obligor to defer
payments until some time after the date on which the goods are delivered or services
are provided; and
(iii) leases, i.e., arrangements under which property is provided which the lessee has
the right to use for one or more specified period(s) of time that are usually shorter
than the total expected service life of the property, while the lesser retains the title to
the property. For the purpose of the guideline, the debt is the present value (at the
inception of the lease) of all lease payments expected to be made during the period of
the agreement excluding those payments that cover the operation, repair or
maintenance of the property.
(b) Under the definition of debt set out in point 21(a) above, arrears, penalties, and judicially
awarded damages arising from the failure to make payment under a contractual obligation
that constitutes debt are debt. Failure to make payment on an obligation that is not considered
debt under this definition (e.g., payment on delivery) will not give rise to debt.”
27.
Nonconcessional debt is defined as debt having a grant element (in net present value
relative to face value) of less than 35 percent, based on the currency- and maturity-specific
Commercial Reference Rates (CIRR), published monthly by the OECD.19 The limit excludes
the disbursements of short-term import-related debts, the use of Fund resources, and
refinancing operations.
B. Performance Criterion on the Net Changes in the Outstanding Stock of Short-Term
External Debt with Original Maturity of Less than One Year Contracted or
Guaranteed by the Central Government
28.
The stock of short-term external debt outstanding is defined as debt with original
maturity of less than one year contracted or guaranteed by the central government. The term
debt is defined as set forth in point No. 9 of the Guidelines on Performance Criteria with
Respect to Foreign Debt (Decision No. 12274-(00/85), August 24, 2000) (see paragraph 27
above), but excludes normal import-related credits.
19
For loans with a maturity of at least 15 years, the 10-year average commercial interest reference rates and for
loans with shorter maturities, the 6-month average CIRRs, as of August 2005 published by the OECD will be
used as the discount rates. To both the 10-year and 6-month averages, the following margins for differing
repayment periods will be added: 0.75 percent for repayment periods of less than 15 years; 1 percent for 15–19
years; 1.15 percent for 20–29 years; and 1.25 percent for 30 years or more.
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ATTACHMENT II
29.
No short-term external debt with original maturity of less than one year, will be
contracted or guaranteed by the central government. This ceiling will be monitored on a
continuous basis.
C. Performance Criterion on Nonaccumulation of Central Government and Central
Government Guaranteed External Payment Arrears
30.
Central government and central government guaranteed external payment
arrears are defined as overdue payments (principal or interest) on debt contracted or
guaranteed by the central government. The definition of external payment arrears under the
program excludes: (i) debt claims that were irrevocably tendered in the debt exchange closed
on September 31, 2005 (the "Debt Exchange”), (ii) debt claims that were eligible to
participate in the Debt Exchange but have not been tendered, and (iii) debts claims of official
bilateral creditors which are under rescheduling or refinancing negotiation. It also does not
include outstanding subscription payments to regional and international organizations, for
which understandings will be reached to ease payment obligations consistent with the
program.
31.
No external payment arrears of the central government and central government
guaranteed debt, will be allowed in the program. This ceiling will be monitored on a
continuous basis.
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ATTACHMENT II
IV. STRUCTURAL CONDITIONALITY
(Structural benchmarks unless otherwise indicated)
Prior Actions for the Fifth Review
•
Passage by Parliament and enactment into law of a VAT Act with an effective date of
March 1, 2006.
•
Approval by Cabinet of an implementation plan to rationalize the wage bill.
Sixth Review
•
Establish legislative basis for the Financial Services Unit (FSU) to supervise
insurance companies and regulate all nonbank financial institutions, including the
Agriculture and Industrial Development Bank (end-December, 2005).
•
Complete strategic review and establish action plans for the operations of Aid Bank,
DEXIA and NDC, with a view to enhancing their efficiency, streamlining their
functions and improving accountability (end-December, 2005).
•
Parliamentary approval of amendments to the Electricity Supply Act and related
legislation (end-December 2005).
•
Complete review by end-February 2006 the streamlining of the structure and
functioning of government ministries and departments, with a view to further
reducing wage bill over the following three years.
•
Implementation of VAT starting March, 1 2006 (structural performance criterion).
This is understood to mean that the first tax period for which the VAT law would
apply starts on March 1, 2006 or earlier.
Seventh Review
•
Cabinet approval of action plan to eliminate the unfunded liabilities of DSS (endMarch 2006).
•
Parliamentary approval of amendments to the Finance Administration Act as
described in paragraph 17 of the SMEP (end-May, 2006).
•
Line ministries to submit rolling three-year expenditure plans (end-May, 2006).
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ATTACHMENT II
V. PERIODIC REPORTING
32.
Regular reporting on a monthly basis (and when possible weekly) will include the
following:
•
Data for monitoring the program’s performance criteria and monthly indicative
targets, including
¾ Fiscal sector
(i)
Central government budgetary accounts.
(ii)
Dominica Social Security Balance Sheet, showing amounts
receivable from central government for contributions and interest.
(iii)
Central government domestic debt data.
(iv)
Current grant inflows.
(v)
Stock of unpaid checks issued and stock of unprocessed claims
due and invoices pending.
(vi)
Capital expenditure (project by project) and composition of
financing, including revised projections for the remainder of the
fiscal year.
(vii)
Balances in the debt servicing account linked to the Royal
Merchant Bank Bond Issue.
(viii) Total number of exemptions issued (by type of exemption).
(ix)
Severance payments and administrative expenditures linked to
the debt restructuring operations, and details about how they
were financed.
¾ Financial sector
(x)
Monetary survey for Dominica as prepared by the Eastern
Caribbean Central Bank, including balances in central
government double signature accounts.
¾ External and real sectors
(xi)
Imports and exports data by product.
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(xii)
ATTACHMENT II
Detailed (creditor by creditor) external debt report from the Debt
Unit in the Ministry of Finance and Planning, showing fiscal
year-to-date disbursements, amortization, interest payments, and
outstanding stocks, for the central government, public enterprises
and AID Bank.
(xiii) Total disbursements/grant receipts, monthly, disaggregated into:
(a) budgetary support (by type—either loans or external “bonds”
and/or other securities); (b) project loans; (c) budgetary grants;
and (d) project grants.
(xiv)
Stock of external payment arrears of the NFPS, including
amortization and interest payment arrears, and supplier arrears
for the central government, public enterprises, and AID Bank.
(xv)
Copies of loan agreements for any new loans contracted,
including financing involving the issue of government paper, and
of any renegotiated agreements on existing loans.
(xvi)
Consumer price index.
(xvii) Real sector indicators.
All information will be reported to Fund staff within three weeks of the end of each month.
33.
Reporting on an annual basis will include the following:
¾ External and real sectors
(xviii) GDP and its components.
(xix)
34.
Balance of payments accounts.
Other reporting will include:
¾ Reports of legislative changes pertaining to economic matters.
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ATTACHMENT III
Dominica: Public Debt Sustainability Analysis
1.
This section assesses the sustainability of Dominica’s public debt using the debt
sustainability analysis (DSA) template for low-income countries. The DSA was conducted
jointly by Fund and Bank staff.
2.
Based on the analysis in the baseline scenario and several alternative scenarios, the
staff conclude that while Dominica’s public debt is sustainable at current output growth rates
and fiscal stance, there are risks of future debt distress if these variables weakened. In
addition, the deficits that Dominica’s social security system (DSS) is expected to face
starting in 2014 pose another challenge to the country’s public finances.
Dominica’s public debt situation at end-2004
3.
Dominica initiated a collaborative debt restructuring process in 2004 with a view to
reducing its debt to a more sustainable level. Following discussions with creditors, the
restructuring targeted an NPV to face value reduction of 50 percent. So far, creditors with
about 70 percent of the debt eligible for restructuring have agreed to the proposal, and the
authorities remain in good faith negotiations with the remaining hold-out creditors.
4.
It is assumed that those creditors not currently participating in the restructuring
receive the intermediate bond. In addition, external interest arrears are excluded since arrears
with participating creditors have been settled as part of the debt restructuring and arrears
with nonparticipating creditors are either in dispute or expected to be settled when an
agreement is reached. Undisputed interest arrears amount to approximately 0.4 percent of
GDP.
5.
As of end of 2004 and after taking into account the restructuring, Dominica had a
public debt of around 116 percent of GDP, with external public debt reaching around
81 percent of GDP. The net present value to GDP ratios stood at approximately 90 percent
for the total public debt and 54 percent for the external. Around 47 percent of GDP is owed
to multilateral creditors (with the Caribbean Development Bank holding almost two thirds of
this). External debt with bilateral creditors is approximately 19 percent of GDP while debt to
commercial creditors is around 16 percent of GDP). With respect to domestic debt, about
15 percent of GDP is owed to Dominica’s Social Security System (DSS) and 20 percent of
GDP is owed to commercial banks, the ECCB, and corporations.
The baseline scenario
6.
The baseline scenario is developed for 2005–2025 and refers to the public debt of the
nonfinancial public sector. The main assumptions are:
•
GDP growth stays at 3 percent. While this assumption implies a rate of growth higher
than the average observed in the 1990s (2 percent), it seems consistent with the
stronger growth observed in 2004 and first half of 2005 and with growth recorded
before the 1990s. In addition, this rate of growth seems achievable given the
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ATTACHMENT III
improved macro policy environment, as well as the structural reforms envisioned in
the draft Growth and Social Protection Strategy document (which is close to being
finalized) and the favorable prospects for the tourism sector.
•
The primary balance of the central government remains at 3 percent of GDP over the
projection period, while pubic enterprises run an overall deficit of 0.5 percent of
GDP. The assumption about the government primary balance is consistent with the
strong fiscal turnaround Dominica has had in recent years and with the target that the
government has committed to maintain under the program. The assumption on public
enterprises follows the average observed during the period 1999–2004.
•
Annual disbursements of external concessional debt reach 1.5 percent of GDP, which
is consistent with the projections of the country’s public sector investment program
(PSIP).
•
New domestic financing can be obtained by the central government and public
enterprises at an interest rate of 7 percent.
7.
Under the baseline scenario (Table 1a), all the indicators of debt burden show that
Dominica’s debt remains sustainable. The only indicator that does not decline continuously
is the debt service to revenue ratio, which temporarily shows an upward trend and then a
decline starting in 2014.20 While the increase in the ratio of debt service to revenue is
temporary, the high debt servicing costs point to the need of maintaining fiscal discipline in
order to avoid liquidity constraints.
8.
Under this scenario, Dominica would reach a public debt to GDP ratio of 60 percent
by 2018.
Sensitivity analysis
Changes in growth and primary balance scenarios
9.
The sensitivity analysis illustrates two important points (Table 2a). First, if Dominica
primary balance and economic growth return to their averages of the last ten years (a
1 percent of GDP primary deficit and 0.8 percent growth), then public debt turns
unsustainable (case described in Scenario A.1). Second, if Dominica can keep the fiscal
effort it made during last year (a primary surplus of around 4.3 percent of GDP), then public
debt remains sustainable (Scenario A.2).
20
The initial upward trend is mainly caused by two features of the debt restructuring. First, the grant extended
by the CDB covers interest payments and amortization of several of the loans Dominica has with that institution
in 2005 and 2006, which makes the debt service to GDP low in those years. Second, Dominica’s debt
restructuring includes a repurchase clause which is expected to increase amortization starting in 2009.
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ATTACHMENT III
10.
In addition, the sensitivity analysis shows the importance of sustaining growth at
current levels. In the alternative Scenario A.3 in which growth falls to 2½ percent per year,
most indicators of debt burden present a slight upward trend. Behind this adverse effect of
growth on the debt burden is the fact that as output growth slows, fiscal revenues would also
likely decline, causing the primary balance to deteriorate. As the interest rate on new
nonconcessional financing (7 percent) is much larger than Dominica’s current average
interest rate (around 2.8 for external debt and 5 percent for domestic debt), this scenario also
increases interest expenditures over time.
Social Security
11.
Dominica Social Security (DSS) is currently running surpluses, but deficits are
expected to emerge starting in 2014 and grow continuously over time. At the request of the
Dominican authorities, a World Bank/FAD technical assistance mission visited the country
in June 2005 to assess the financial situation of DSS and propose possible reforms.
12.
While the projected deficits in the social security system are expected to be addressed
through structural reforms, a scenario on the implications of direct transfers from the central
government on the debt path in absence of reforms was also considered. The exercise
assumes that the government starts making transfers in 2014 in order to cover DSS’ deficits.
Under this scenario, public debt to GDP initially declines (reaching around 60 percent in
2020) but then starts to increase again as DSS deficits become larger over time.
Changes in interest rates
13.
Given that Dominica’s debt to GDP ratio is still high, the implication of adverse
changes in interest rates was also considered.
130
120
110
90
80
130
120
1 percent real GDP growth
100
Debt/GDP
14.
Chart 1a describes the path of the
public debt to GDP ratio assuming the
interest rates available for new financing
reaches 12 percent (5 percentage points above
the baseline scenario) and different growth
rates. As can be seen in the graph, public debt
remains sustainable when the other key
variables remain under the baseline
assumptions (i.e., 3 percent GDP growth and
3 percent primary surplus) although its
decline is much slower than in the baseline
scenario. When GDP growth declines to
2 percent, then public debt stabilizes at
around 75 percent of GDP at the end of the
projection period. With a GDP growth of
1 percent, public debt would return to an
unsustainable path.
Chart 1.a. Dominica: Public Sector Debt to GDP
2004-2025, 1/
110
100
2 percent real GDP growth
90
80
70
70
60
60
50
3 percent real GDP growth
40
50
40
2004 2007 2010 2013 2016 2019 2022 2025
1/ Assumes 3 percent primary surplus by the Central
Government. Excludes the impact of DSS deficits and
abstracts from natural disasters. T he interest rate for new
financing is assumed to be 12 percent, which is five
percentage points above the baseline assumption.
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ATTACHMENT III
Natural disasters
15.
The impact of natural disasters can be analyzed using the stress tests provided in
Table 2a. For instance, the fifth bound test presented in Table 2a suggests that Dominica’s
debt would remain sustainable after a natural disaster that increased the debt to GDP ratio by
10 percent in 2006.21
21
Given the variability of the impact of natural disasters, it is difficult to determine the appropriate magnitude
for this test. However, the ECCU Selected Issues Paper from 2004, looks at a sample of 12 large natural
disasters occurring in the ECCU since 1970 and reports a median public debt increase of 6.5 percent of GDP
over a period of three years after the disaster. The shock presented here is larger than what would be suggested
by the previous evidence.
...
...
...
...
11.8
...
7.0
14.2
-32.4
-4.7
5.0
8.0
1.0
0.6
6.0
...
NPV of public sector debt
o/w foreign-currency denominated
o/w external
NPV of external debt in percent of exports
External debt service in percent of exports
NPV of contingent liabilities (not included in public sector debt)
Debt service-to-revenue ratio (in percent) 3/ 4/
Primary deficit that stabilizes the debt-to-GDP ratio
Key macroeconomic and fiscal assumptions
Real GDP growth (in percent)
Average nominal interest rate on forex debt (in percent)
Average real interest rate on domestic currency debt (in percent)
Real exchange rate depreciation (in percent, + indicates depreciation)
Inflation rate (GDP deflator, in percent)
Growth of real primary spending (deflated by GDP deflator, in percent)
Grant element of new external borrowing (in percent)
0.0
3.9
3.3
0.4
1.5
4.5
...
21.3
-9.4
...
...
...
...
19.5
...
4.6
3.4
-2.6
-6.1
49.9
9.2
43.9
3.5
3.2
3.2
0.0
0.3
0.0
0.0
0.0
0.0
0.0
5.9
130.6
84.4
2003
3.5
4.0
1.4
0.7
1.4
5.0
...
90.0
54.6
54.6
115.0
20.8
...
2.6
184.4
111.7
14.3
9.6
-13.9
-11.6
-4.4
48.8
6.1
44.5
-1.7
-2.3
2.1
-4.4
0.6
-5.6
0.0
-0.9
-4.6
0.0
-2.4
116.7
81.2
2004
0.9
3.7
6.1
0.3
1.5
2.7
0.9
Historical
Average 5/
3.0
1.0
3.0
1.0
0.8
11.4
4.5
Standard
Deviation 5/
(In percent of GDP, unless otherwise indicated)
Sources: Country authorities; and Fund staff estimates and projections.
1/ Non-financial Public Sector (includes debt with Dominica's Social Security System)
2/ Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period.
3/ Revenues including grants.
4/ Debt service is defined as the sum of interest and amortization of medium and long-term debt.
5/ Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.
6/ In 2004, it is assumed that all nonparticipating creditors received the intermediate bond, which carries a face value reduction of 20 percent.
7/ Refers to external debt. Assumes that nonpartcipating creditors receive the intermediate bond. Excludes external interest arrears.
Arrears with participating creditors have been settled as part of the debt restructuring. Arrears with nonparticipating creditors
are either in dispute or expected to be settled when an agreement is reached. Undisputed interest arrears are approximately 0.4 percent of GDP
8/ Fiscal year aggregates presented on a fiscal year basis
o/w external
Gross financing need 2/
NPV of public sector debt-to-revenue ratio (in percent) 3/
33.6
11.0
1.2
41.2
4.5
42.4
9.8
9.1
4.5
4.6
0.7
0.0
0.0
0.0
0.0
0.0
22.6
127.2
79.9
Change in public sector debt
Identified debt-creating flows 8/
Primary deficit
Revenue and grants
of which : grants
Primary (noninterest) expenditure
Automatic debt dynamics
Contribution from interest rate/growth differential
of which : contribution from average real interest rate
of which : contribution from real GDP growth
Contribution from real exchange rate depreciation
Other identified debt-creating flows
Privatization receipts (negative)
Recognition of implicit or contingent liabilities
Debt relief (HIPC and other) 6/
Other (specify, e.g. bank recapitalization)
Residual, including asset changes
Public sector debt 1/
o/w foreign-currency denominated 7/
2002
Actual
3.0
2.1
3.5
0.8
1.5
2.1
35.6
83.3
55.3
55.3
111.8
6.1
...
1.8
175.5
116.5
10.6
4.3
-7.6
-7.6
-3.3
47.5
8.3
44.2
-1.8
-2.4
1.0
-3.4
0.6
-2.5
-2.0
0.0
-0.6
0.0
0.0
109.1
81.1
2005
Estimate
3.0
2.1
3.7
...
1.5
2.5
35.6
79.9
53.6
53.6
108.2
8.4
...
2.6
169.1
113.5
12.5
1.9
-5.2
-5.0
-3.3
47.3
8.3
44.0
-1.7
-2.2
1.0
-3.2
0.4
0.0
0.0
0.0
0.0
0.0
-0.2
103.9
77.6
2006
Table 1a.Dominica: Public Sector Debt Sustainability Framework, 2002-2025
3.0
2.8
3.8
...
1.5
2.5
35.6
77.7
51.1
51.1
102.9
10.0
...
3.1
164.8
108.4
13.7
1.0
-4.4
-4.4
-3.3
47.2
8.3
43.8
-1.1
-1.5
1.5
-3.0
0.4
0.0
0.0
0.0
0.0
0.0
0.1
99.5
72.9
2007
3.0
2.7
3.8
...
1.5
2.8
35.6
75.4
48.7
48.7
97.9
9.6
...
3.0
160.2
103.5
13.3
1.0
-4.3
-4.3
-3.3
47.1
8.3
43.8
-1.1
-1.4
1.5
-2.9
0.4
0.0
0.0
0.0
0.0
0.0
0.1
95.3
68.5
2008
3.0
2.7
3.7
...
1.5
2.9
35.6
73.2
46.2
46.2
92.7
9.5
...
4.0
155.4
98.2
15.3
0.9
-4.2
-4.2
-3.2
47.1
8.3
43.9
-1.0
-1.3
1.4
-2.8
0.3
0.0
0.0
0.0
0.0
0.0
0.1
91.1
64.2
2009
3.0
2.7
3.8
...
1.5
2.9
35.6
70.9
42.5
42.5
85.0
11.9
...
5.8
150.5
90.2
19.1
0.8
-4.0
-4.1
-3.2
47.1
8.3
43.9
-0.9
-1.2
1.4
-2.7
0.3
0.0
0.0
0.0
0.0
0.0
0.1
87.1
58.7
2010
...
...
...
1.5
2.9
35.6
...
1.5
2.6
35.6
1.5
2.8
35.6
3.0
3.2
5.4
1.8
72.2
37.0
10.4
-0.2
...
3.7
126.0
63.1
14.4
0.2
34.0
17.4
17.4
34.8
3.8
-2.9
-3.0
-3.1
47.1
8.3
44.0
0.1
0.0
1.2
-1.2
...
0.0
0.0
0.0
0.0
0.0
0.1
39.7
23.1
2025
59.3
29.7
29.7
59.4
7.2
-3.3
-3.3
-3.1
47.1
8.3
44.0
-0.2
-0.4
1.7
-2.1
...
0.0
0.0
0.0
0.0
0.0
0.1
69.4
39.7
2015
3.0
2.8
4.6
3.0
2.5
3.7
-3.3
Average
2005-2010
Projections
1.5
2.9
...
...
3.0
2.9
4.7
-3.1
Average
2011-2025
- 76 ATTACHMENT III
- 77 -
ATTACHMENT III
Table 2a.Dominica: Sensitivity Analysis for Key Indicators of Public Debt 2005-2025
Estimate
2005
2006
2007
2008
Projections
2009 2010
2015
2025
NPV of Debt-to-GDP Ratio
Baseline
83
80
78
75
73
71
59
34
83
82
83
86
78
81
90
74
79
94
71
78
99
67
77
104
63
76
133
43
75
229
-8
94
83
83
83
83
83
86
89
89
104
90
92
95
97
102
88
94
94
95
100
86
96
92
92
98
84
98
90
90
95
83
109
80
75
81
74
140
54
38
45
55
175
169
165
160
155
150
126
72
175
173
175
181
164
170
190
158
168
198
150
165
207
143
163
216
135
161
272
91
158
449
-17
197
175
175
175
175
176
181
187
188
220
190
192
202
204
216
187
196
199
199
212
183
200
195
194
207
180
204
191
188
202
176
227
170
159
173
157
295
115
81
96
116
11
12
14
13
15
19
14
10
11
11
11
13
12
13
17
12
14
19
12
14
23
13
16
29
17
20
33
10
19
61
-2
27
11
11
11
11
11
13
12
13
13
12
16
20
20
16
21
18
23
22
16
17
22
21
20
18
18
27
24
23
21
22
27
19
17
16
18
40
16
11
10
16
A. Alternative scenarios
A1. Real GDP growth and primary balance are at historical averages
A2. Primary balance is unchanged from 2004
A3. Permanently lower GDP growth 1/
B. Bound tests
B1. Real GDP growth is at historical average minus one standard deviations in 2006-2007
B2. Primary balance is at historical average minus one standard deviations in 2006-2007
B3. Combination of B1-B2 using one half standard deviation shocks
B4. One-time 30 percent real depreciation in 2006
B5. 10 percent of GDP increase in other debt-creating flows in 2006
NPV of Debt-to-Revenue Ratio 2/
Baseline
A. Alternative scenarios
A1. Real GDP growth and primary balance are at historical averages
A2. Primary balance is unchanged from 2004
A3. Permanently lower GDP growth 1/
B. Bound tests
B1. Real GDP growth is at historical average minus one standard deviations in 2006-2007
B2. Primary balance is at historical average minus one standard deviations in 2006-2007
B3. Combination of B1-B2 using one half standard deviation shocks
B4. One-time 30 percent real depreciation in 2006
B5. 10 percent of GDP increase in other debt-creating flows in 2006
Debt Service-to-Revenue Ratio 2/
Baseline
A. Alternative scenarios
A1. Real GDP growth and primary balance are at historical averages
A2. Primary balance is unchanged from 2004
A3. Permanently lower GDP growth 1/
B. Bound tests
B1. Real GDP growth is at historical average minus one standard deviations in 2006-2007
B2. Primary balance is at historical average minus one standard deviations in 2006-2007
B3. Combination of B1-B2 using one half standard deviation shocks
B4. One-time 30 percent real depreciation in 2006
B5. 10 percent of GDP increase in other debt-creating flows in 2006
Sources: Country authorities; and Fund staff estimates and projections.
1/ Assumes that real GDP growth is at baseline minus one standard deviation divided by the square root of 20 (i.e., the length of the projection period).
2/ Revenues are defined inclusive of grants.
- 78 -
ATTACHMENT IV
Roseau, Dominica
September 8, 2005
Mr. Rodrigo de Rato,
Managing Director,
International Monetary Fund
700 19th Street, NW,
Washington, DC 20431
USA
Dear Mr. de Rato,
The attached report outlines the status of the Government of the Commonwealth of
Dominica’s growth and social protection strategy paper which is expected to be finalized
before the end of this year.
Sincerely,
/s/
Honourable Roosevelt Skerrit
Prime Minister and Minister of Finance and Planning
Attachment
- 79 -
ATTACHMENT IV
Dominica—Preparation Status Report of Growth and Social Protection Strategy
Introduction
The Government of the Commonwealth of Dominica (GOCD) submitted its Interim Poverty
Reduction Strategy Paper (I-PRSP) to the Boards of the IMF and the World Bank in
December of 2003. In that document, the government presented an assessment of the poverty
situation in Dominica, and outlined an interim medium- and long-term strategy to tackle it.
The Executive Boards of both the World Bank and the International Monetary Fund, as well
as the staffs of the two institutions have given us valuable feedback on our interim strategy
paper. In particular, the Joint Staff Assessment emphasized the need for a more detailed
analysis of the structural reforms needed in Dominica and highlighted the importance of
maintaining macroeconomic stability. Staffs also suggested involving the large Dominican
Diaspora in the consultation process.
Status of the Poverty Reduction Strategy Paper
At the time the paper was submitted, it was envisaged that our Growth and Social Protection
Strategy (GSPS) would be finalized by the end of 2004. While we have made substantial
progress in developing many of the areas outlined in the I-PRSP and issues raised in the
consultation process, the GSPS has not yet been completed.
While recognizing the advantages of having a finalized poverty reduction strategy in place,
the GOCD has considered it important that additional time be taken-up to finalize the report
for two reasons. First, the government expects the GSPS to guide its policies over the
medium term and, in consequence, wants it to cover all of the areas that are relevant for its
reform agenda. Second, given the importance of the document, we have decided to undertake
an extensive consultation process. Following a series of focus group discussions earlier in the
year, we have also discussed the GSPS at a donors meeting held in June 2005.
At this stage, we are the in process of finalizing GSPS, and expect to submit the document to
the Boards of the Bank and Fund by the end of this year.
Issues Raised in Joint Staff Assessment
The GSPS tries to address many of the issues that were raised in the staff’s joint assessment:
•
In the area of macroeconomic stability, we have taken measures to improve the
primary balance and sought collaborative debt restructuring, helping put public
finances on a firmer footing.
•
Fiscal structural reforms that we are currently considering include amendments to the
Finance Administration Act which will ensure fiscal responsibility in the future. We
- 80 -
ATTACHMENT IV
have also recently passed legislation that will allow the introduction of a Value
Added Tax in March of 2006. Reforms are also being taken on the expenditure side,
where we continue to rationalize public wages.
•
The government has advanced its sectoral strategy to enhance growth in several
dimensions. For instance, the country now has a national tourism policy which will
set the policy agenda in the medium term. With technical assistance from the World
Bank, the government has been reviewing its Electricity Supply Act in order to
modify it and allow the exploitation of geothermal energy, which potentially can be
exported to neighboring islands. The government is also overseeing the development
of a water industry in Dominica, with the potential to export bulk and bottled water.
•
The government has also made progress in the area of social protection. For instance,
with technical assistance from the IMF and the World Bank, the government is
currently assessing how to tackle the unfunded liabilities of the social security
system, which will start to run deficits starting in 2014 as population aging puts
pressure on the system. The government has also analyzed more carefully the
problematic of HIV/AIDS in the country and the situation of the Carib community.
The government strategy to deal with these two issues will be presented in the final
GSPS.
•
The final version of the GSPS will contain a much more detailed structural reform
agenda than the one envisaged in the I-PRSP. This reflects the considerable emphasis
the government is putting to the country’s structural reform as well as the result of the
consultation process and technical assistance provided by international organizations
and donors.
New timeline
Having now reviewed the recommendations from the extensive consultation process in the
first half of 2005, we feel comfortable that the GSPS can be finalized shortly, and on the
outside by the end of the year.
Public Information Notice (PIN) No. 05/149
FOR IMMEDIATE RELEASE
October 25, 2005
International Monetary Fund
700 19th Street, NW
Washington, D. C. 20431 USA
IMF Executive Board Concludes 2005 Article IV Consultation with
Dominica
On October, 14, 2005, the Executive Board of the International Monetary Fund (IMF) concluded
the Article IV consultation with Dominica.1
Background
Dominica is recovering from the aftermath of an economic and financial crisis in 2001–02 when
output contracted by 10 percent. The crisis originated in the expansionary fiscal policies of the
preceding decade, when the authorities sought to prop-up activity by increasing public
spending. The primary balance of the central government turned strongly negative in the mid1990s, public debt quickly reached unsustainable levels, and financing constraints soon led to a
rapid accumulation of mostly domestic arrears. By 2001, financing was available only at
precipitously high interest rates and the government faced a major liquidity crisis. Additionally,
the adverse effects of a severe drought on agriculture and the September 2001 terrorist attacks
on the nascent tourism sector, precipitated a steep recession.
Dominica has come a long way from the low-point of the crisis. In mid-2002, the government
initiated a stabilization program aimed at ensuring an orderly adjustment, strengthening public
finances and implementing measures to reinvigorate growth. With the debt-to-GDP ratio
approaching 130 percent, the authorities concluded in December 2003 that the debt situation
was unsustainable and launched a debt exchange offer. The IMF has supported the authorities’
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with
members, usually every year. A staff team visits the country, collects economic and financial
information, and discusses with officials the country's economic developments and policies.
On return to headquarters, the staff prepares a report, which forms the basis for discussion by
the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman
of the Board, summarizes the views of Executive Directors, and this summary is transmitted to
the country's authorities.
1
-2reforms since 2002 initially through a Stand-By Arrangement (SBA) and since end-2003 through
a PRGF arrangement.
The reform strategy has been very successful. Economic growth has recovered to over
3 percent a year and is set to record the second straight year of above average growth in 2005.
Inflation declined in 2004 and remains subdued in 2005 despite the higher energy prices.
Reflecting strong fiscal consolidation and a collaborative debt restructuring agreement, public
finances are now on a firmer footing. The central government primary balance has swung to a
surplus of 4½ percent of GDP in 2004/05, with both higher revenues and lower spending
contributing to the improvement. The debt restructuring process coupled with the fiscal
consolidation effort allowed the debt stock to decline to 117 percent of GDP at end-2004.
However, progress on structural reforms has been slower than expected, reflecting in part a
limited implementation capacity and difficulties in building consensus.
Developments in the external position mirrors the economic recovery and the improved global
environment. Import growth has been robust on account of the economic recovery but the
impact on the current account has been partially offset by increased tourism receipts. Financial
intermediation has also rebounded, and having contracted since early 2001, credit to the private
sector has been growing from mid-2004. Private sector deposits grew moderately while net
lending to government fell with the improved fiscal position, resulting in a substantial increase of
the net foreign assets of commercial banks. Prudential indicators for the banking system’s asset
quality have remained broadly unchanged. However, poverty and unemployment remain
serious concerns.
Executive Board Assessment
Executive Directors commended the Dominican authorities for the successful implementation of
their economic program that has been supported by a PRGF arrangement since end-2003.
Directors applauded the remarkable rebound in economic performance over the past two years,
from the economic and financial crisis experienced in 2001−02. They attributed this turnaround
to the strong policies being pursued by the authorities.
Directors pointed to the strong improvement in public finances, which has engendered
confidence and restored the foundation for economic growth. Fiscal consolidation, which
contributed to reversing the debt build-up, has helped reestablish macroeconomic stability.
With the stability provided by the regional currency board arrangement and aided by the
depreciation of the U.S. dollar in recent years, Directors considered that the competitiveness of
the economy is adequate. Still, they stressed that Dominica continues to face significant
challenges. They pointed in particular to the continuing very high level of debt, structural
rigidities, and to the economy’s large exposure to exogenous shocks, as evidenced by the
recent rise in oil prices and the impact of preference erosion on the banana sector.
Directors underscored the critical importance of policies to strengthen the resilience of the
economy and sustain the growth momentum. They therefore called on the authorities to
consolidate the gains thus far, with particular focus on fiscal discipline and consolidation and
accelerated structural reforms.
-3Directors welcomed the recent steps to bolster public finances, but emphasized the need to
reduce the debt burden further. They noted the adoption of value-added and excise tax
legislation to allow for a VAT to come into effect on March 1, 2006, which should help improve
the efficiency of the tax system. Directors welcomed the government’s decision to publish
information on tax concessions as an important step toward improving the transparency of
public finances. They also noted the need for boosting the efficiency of government spending,
streamlining public sector employment, and limiting the public sector investment program to
well-targeted projects with high returns. In this regard, they welcomed the actions in the 2005/06
budget as further steps in the right direction. Directors also supported the government’s
objective of a smaller, more efficient, and better paid public service, but emphasized that this
would require extensive rationalization of the structure and functions of ministries and
departments. It will be important that the authorities continue targeting a primary surplus of
3 percent of GDP or higher, with a view to reducing debt to at least 60 percent of GDP over the
next decade.
Directors commended the authorities for their efforts to reach collaborative agreements with
creditors in the debt-restructuring process. They noted the depositing of payments to
nonparticipating creditors into an escrow account as evidence of the authorities’ good-faith
approach. Directors were concerned, however, that reaching agreement with the last few holdout creditors is taking time, and noted in particular the recent unfortunate actions by one large
creditor. Directors recognized the importance of these creditors engaging with the authorities in
a timely and constructive manner in order to reach a collaborative agreement. They also urged
the authorities to complete expeditiously the issuance of the new bonds to participating
creditors, and finalize the legislative changes needed to make these bonds tradable on the
Eastern Caribbean Securities Exchange.
Directors emphasized the need for deepening structural reforms to sustain the current growth
momentum. They welcomed the authorities’ efforts towards removing bottlenecks that are
impeding private investment. They noted the potential in the energy sector, and pointed to the
benefits of liberalizing the electricity market to allow new entrants. Directors saw merit in
rationalizing the operations of existing investment promotion agencies with a view to creating a
one-stop investment promotion center. Directors also noted the need for modernizing the land
registration process to ensure comprehensive coverage. Directors considered that, by creating
a more enabling business environment, such reforms would do more, over time, to attract
investment and stimulate private sector-led growth than the current reliance on tax incentives.
In any event, it was considered that the region as a whole would be better served by a
cooperative—rather than a competitive—solution to the tax incentive issue.
While noting that much progress had been made over the past two years, Directors pointed to
the many challenges that persist in addressing vulnerabilities in the economy. They called for
polices to prepare better for exogenous shocks, including those stemming from the high
exposure to natural disasters. Directors also underscored the need to address the large
unfunded liabilities of the social security system, which constitute a major risk to public finances.
They stressed the importance of early and significant actions for social security reform, and
were encouraged by the authorities’ intention to review recommendations to overhaul the
scheme. Directors also pointed to vulnerabilities in the financial sector, and the scope for
-4strengthening regulatory oversight of nonbank institutions. They supported the provision of Fund
technical assistance to strengthen the supervisory framework for AML/CFT in the nonbank
sector, and encouraged the authorities to take the requisite actions. While the banking system
remains generally sound, closer scrutiny of new bank lending was seen as helpful in reducing
nonperforming loans. Directors noted that the manner in which these challenges are addressed
will have a bearing on the durability of the economic recovery and sustainability of public
finances.
Directors commended the authorities for seeking to bring the different elements of the reform
agenda together in their forthcoming Growth and Social Protection Strategy document.
They emphasized that progress in lowering unemployment and reducing poverty would depend
critically on consolidating the gains made in macroeconomic stabilization and on fostering
growth by creating a more conducive business environment. Directors noted that the present
economic rebound and the government’s renewed political mandate offer an important
opportunity for the government to advance reforms. They called on the international community
to support Dominica’s reform effort, not least through speedy disbursement of already promised
funds.
Directors encouraged the authorities to improve the quality of core statistics, which they
considered key for effective surveillance.
Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's
views and analysis of economic developments and policies. With the consent of the country
(or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations
with member countries, of its surveillance of developments at the regional level, of post-program
monitoring, and of ex post assessments of member countries with longer-term program engagements.
PINs are also issued after Executive Board discussions of general policy matters, unless otherwise
decided by the Executive Board in a particular case.
-5-
Dominica: Selected Economic Indicators
2002
2003
Prel.
2004
Proj.
2005
(Annual percentage change)
Real sector
Real GDP
-4.7
0.0
3.5
3.1
GDP deflator
-0.4
1.7
1.2
1.5
0.4
2.9
0.8
1.5
Central government overall balance 1/
-5.4
-1.3
-0.6
-2.5
Central government primary balance 1/
-1.6
5.6
4.4
3.0
Revenue and grants 1/
32.7
40.0
39.1
37.7
Expenditure and net lending 1/
38.2
41.3
39.6
40.2
127.2
130.6
116.7
109.1
Consumer prices, end of year
(In percent of GDP)
Public finances
Total public sector debt
(In percent of GDP, unless otherwise indicated)
External sector
Current account balance
-13.8
-13.0
-17.2
-19.2
Trade balance
-23.3
-27.4
-31.2
-33.0
Travel receipts
18.1
20.2
22.2
23.2
Exports, f.o.b. (percentage change)
-1.8
-6.0
3.0
5.2
Imports, f.o.b. (percentage change)
-11.5
9.3
13.5
8.6
Real effective exchange rate (percentage change) 2/
-6.3
-6.7
-7.0
...
External public sector debt (end of period)
79.9
84.4
81.2
81.1
19.3
17.3
8.1
4.1
Net domestic assets 3/
-10.8
-16.4
-2.1
1.9
Private sector credit 3/
-1.3
-2.3
4.3
5.1
8.5
1.0
5.9
6.0
(Annual percentage change)
Money and credit
Net foreign assets 3/
Broad money
Sources: Dominican authorities; Eastern Caribbean Central Bank; and IMF staff estimates.
1/ Data are on a fiscal year basis, beginning July 1 of the year shown.
2/ End of period (depreciation -).
3/ Changes relative to broad money at the beginning of the period.
Press Release No. 05/227
FOR IMMEDIATE RELEASE
October 14, 2005
International Monetary Fund
Washington, D.C. 20431 USA
IMF Executive Board Completes Fifth Review of Dominica's PRGF
Arrangement, Approves US$1.7 Million Disbursement
The Executive Board of the International Monetary Fund (IMF) has completed the fifth review
of Dominica's performance under its three-year Poverty Reduction and Growth Facility (PRGF)
arrangement. The Board also completed Dominica’s financial assurances review, which is
required in accordance with the IMF Guidelines on Conditionality to ensure adequate safeguards
of IMF resources, and approved a waiver for the non-observance of a continuous performance
criterion on nonaccumulation of external payments arrears.
Additionally, the Executive Board approved a one-year extension of Dominica's repayment
expectations to the IMF in a total amount equivalent to SDR 1.3 million (about US$1.8 million)
arising from December 22, 2005 through December 22, 2006. The repayments will now fall due
exactly one year after these dates.
As a result of the Executive Board’s completion of the fifth review, Dominica can draw an
amount equivalent to SDR 1.2 million (about US$1.7 million) under the PRGF arrangement,
which will bring total disbursements to SDR 5.4 million (about US$7.7 million). The Executive
Board approved Dominica's three-year PRGF arrangement on December 29, 2003 (see Press
Release No. 03/228) for an amount equivalent to SDR 7.7 million (about US$11.1 million).
Following the Executive Board's discussion of Dominica on October 14, Mr. Agustín Carstens,
Deputy Managing Director and Acting Chair, made the following statement:
“The Dominican economy has achieved a remarkable turnaround since the low-point of 2001–
02, and is now set to record the second straight year of above average growth. The recovery is to
a large extent a reflection of the authorities’ successful implementation of their economic
program and the resulting restoration of confidence. Continued progress with the reform agenda
is essential to sustain the current momentum and address remaining vulnerabilities in the
economy.
“The clearest evidence of the success of Dominica’s adjustment program has been the marked
strengthening of public finances. As a result, the public debt burden has been set on a downward
-2-
course. Recent legislative changes will boost the efficiency of tax collection and increase the
transparency of public finances.
“Public debt is still high, however, and fiscal policy will need to remain geared towards further
debt reduction. The 2005/06 budget targets a primary surplus that appropriately balances the
need to reduce debt with the need to reinstate the 5 percent cut in public wages introduced in the
2003/04 budget. Looking ahead, it will be important to continue targeting fiscal surpluses
consistent with the objective of reducing debt to a more manageable level, including by a
focused effort on containing the government’s wage bill. Ideally, the aim should be to reduce the
debt-to-GDP ratio to at least 60 percent over the next decade, which would provide an anchor for
public expectations and improve the credibility of fiscal policy.
“Finalizing the debt-restructuring process will also help provide clarity to the debt issue.
Dominica has made commendable progress in reaching collaborative agreements with most
creditors, and continues to demonstrate good faith by depositing payments to nonparticipating
creditors into escrow accounts under the restructured terms. It is a concern that agreements with
the remaining nonparticipating creditors have not yet materialized. Although there appears to be
progress in most cases, the recent actions by one outstanding creditor is unfortunate. As a result,
continued efforts will be needed to reach a collaborative agreement and hence to complete the
debt restructuring process in a timely fashion.
“A fundamental challenge going forward is to underpin the current growth momentum with
further progress on structural reforms. Addressing remaining risks to public finances will be
critical, including those from the large unfunded liabilities of the social security system.
Removing bottlenecks that are impeding private investment should also be a high priority.
This calls for reforming the electricity market to allow new entrants, rationalizing the existing
investment promotion agencies, and modernizing the land registration process to ensure
comprehensive coverage. Indeed, over time, such reforms to create a more enabling business
environment are more likely to stimulate private sector led growth than the current reliance on
tax incentives. Reducing financial sector vulnerabilities by strengthening regulatory oversight
will also be important for maintaining macroeconomic stability.
“The Dominican authorities are seeking to bring all the different elements of the reform agenda
together in their forthcoming Growth and Social Protection Strategy document. The premise is
that progress in lowering unemployment and reducing poverty will depend critically on
consolidating gains made in macroeconomic stabilization and on fostering a more conducive
business environment. With the rebound in economic activity, the government is in a good
position to carry out an ambitious reform agenda that will have a lasting impact on the economy.
The international community, in turn, should actively support the authorities’ efforts and
objectives,” Mr. Carstens said.